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Economic Benefits: Definition & Concept

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  • 0:01 What Are Economic Benefits?
  • 0:34 Surplus
  • 4:08 Net Income and Policies
  • 5:27 Lesson Summary
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Lesson Transcript
Instructor: Kallie Wells
Economic benefits are often used to determine what may be gained from making certain business or political decisions. In this lesson, you will learn what economic benefits are and how they can be measured.

What Are Economic Benefits?

Economic benefits are benefits that can be quantified in terms of money generated, such as net income, revenues, etc. It can also be money saved when discussing a policy to reduce costs. How one measures economic benefits really depends on what he is analyzing. Economic benefits can be measured and used in business decisions, policy decisions, and market analyses. Businesses will probably use measures such as net income, net cash flow, or return on investment. Policy makers will likely use consumer and producer surplus measures.

Surplus

When discussing economic benefits of a particular market, measuring consumer and producer surplus is the common method. Consumer surplus is the difference between the maximum price one was willing to pay and what they actually paid. Producer surplus is the difference between what suppliers were paid and what they were willing to get paid for the good they produced. Each market has a supply and demand curve. Therefore, one can measure the economic benefit to consumers (consumer surplus) and the economic benefit to producers (producer surplus) in that market. The summation of consumer and producer surplus gives the total economic benefit to society from the given market. Let's assume the following chart shows the supply and demand curves for peanut butter.

cs and ps chart

The definition of a demand curve is the willingness and ability of consumer to buy a good at varying price points. Given the demand curve for peanut butter in this chart, there are some consumers willing and able to pay $10 for a jar. However, the market price, the price they actually have to pay, is $5.50. Those consumers that were willing and able to pay more for the good than what they had to, realize an economic benefit equal to the difference between what they would have paid and what they actually paid. So those willing to pay $10 have an economic benefit of $4.50, the difference between $10 and $5.50. The area under the demand curve and above the market price out to the market clearing quantity, represents the consumer surplus (blue shaded area) for everyone in the market.

Because the area in this example is a triangle, and the area of a triangle is equal to one half the base times the height, we can calculate the exact consumer surplus in this example. The base is 550 and height $4.50. Therefore 550 times $4.50 divided by two gives us $1237.50 as the consumer surplus.

The same type of benefit exists for the producers. The supply curve shows the willingness and ability for all producers to supply the good at varying price points. Some of the suppliers were willing and able to produce the good at $1 per jar, but were actually paid $5.50. The producer surplus, then, is the difference between the price they were paid for the good and the price they were willing to accept for the good. Those willing to be paid $1 have an economic benefit of $4.50. The area above the supply curve, below the market price and out to the market clearing quantity, represents the producer surplus (pink shaded area) for everyone in the market.

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