consumer surplus is the value created through exchange which accrues to the consumer it is the difference between what consumers have to pay and what they would be willing to pay consumer surplus measures the consumers gains from trade and obviously we would like that area to be big producer Surplus is the value created through exchange which accrues to the producer it is the cumulative difference between the price earned when selling a product and the marginal cost of producing that product producer Surplus measures the producers gains from trade and certainly producers want that area to be big to really understand consumer and producer Surplus we should take a step back and ask what is the economy for the economy takes things like labor capital and natural resources and uses them to produce stuff that people need and want but it doesn't stop there because it also distributes the things that get produced to the people in the economy we know from our study of demand that the people who will end up with the things we produce will be those who are willing to pay the most for them but is the economy really producing the things people want if the economy is at equilibrium the answer is yes only at the market equilibrium will we have exhausted all mutually beneficial trades and maximized total welfare which is the combination of both consumer and producer Surplus remember that Supply includes the implicit costs of production which are the other uses we have for these resources to the left of the equilibrium are trades where someone is willing to pay more than what it truly costs to produce something opportunity costs and all consumer and producer Surplus together show how much more valuable this particular product is compared to every other possible thing we could have made instead and of course that increased value only exists up to the point of equilibrium to the right of equilibrium are trades where the cost of production exceeds what people are willing to pay meaning that people don't really want more of this thing because they value the other uses of those resources more than this equilibrium is where total Surplus is maximized meaning that we are producing exactly the quantity of this product that people actually want and are willing to pay for to better understand we can look at the situation where the price is not at equilibrium if the price is too high and unable to come down fewer people are willing to pay for the good and the quantity demanded decreases below equilibrium likewise if the price is too low and unable to rise fewer firms are willing to produce the good and the quantity supplied decreases below equilibrium at these prices whether high or low there are fewer transactions than there are at equilibrium meaning that there are mutually beneficial trades available that are not happening those trades fall into this area here which we call deadweight loss deadweight loss is the reduction in economic surplus due to economic inactivity within that black triangle are people willing to pay more than what producers need to earn in order to be willing to produce one more of that product that is consumers are willing to pay more than what it costs but for some reason those trades aren't happening dead weight loss is the Lost value from exchanges that don't occur here the economy is failing to produce more of a product that people actually want you'll have to wait a few chapters to see what sort of conditions lead to deadweight loss but what we can note right now is that markets in equilibrium don't have any deadweight loss and that is a good thing