It is the difference between the price I pay for a good and the price I am willing to pay for it, rather than go without it.
Simple real life example: Think of a car auction, and you are the buyer.
You were willing to go up to 20,000 dollars on the car of your choice, but the bidding ended at 15,000 dollars with you being the highest bidder.
You bought the car at 15,000 dollars and thus enjoyed a 5000 dollar (the difference between what I was willing to pay for the car and what I actually paid for it) consumer surplus.
To determine the consumer surplus we first need to reflect back on the basic character of the demand curve.
Every point on the demand curve indicates a price and a specific quantity demanded at that price.
Thus at price P2, quantity demanded will be OQ2.
At price P3, quantity demanded will be OQ3.
By extension, at price P*, quantity demanded will be OQ*.
Thus we can conclude that consumers are willing to pay price P2 for quantity OQ2.
Now if the market equilibrium price is OP*, then the entire quantity OQ* is bought by the consumer at unit price OP*.
So we can say that the consumer pays unit price OP* even for quantity OQ2.
Thus when the consumer is paying unit price OP* even for quantity OQ2, he is enjoying a consumer surplus of P*P2 or BC price per unit.
That is the difference between what the consumer was willing to pay for the good, price OP2 and what he actually paid for it, OP*.
By extension the consumer surplus per unit at quantity OQ3 is P3P* or DE.
Thus the total amount of consumer surplus enjoyed by the buyer is the whole area P*P1A, when the market equilibrium price is OP*.
The bottom line is that the consumer surplus is the whole area under the demand curve up-to market price.
It is the difference between the price the producer is paid for a good and the price at which he is willing to supply the good.
Simple real life example: Think of a car auction, and now you are the seller.
You were willing to sell the car for 12,000 dollars (your minimum reserve price), but the bidding ended at 15,000 dollars, and it sold at that price.
Thus you as the seller enjoyed a 3000 dollar (the difference between what you were willing to sell the good for, and the price at which you actually sold the good) producer's surplus.
To determine the producer surplus we first need to reflect back on the basic character of the supply curve.
Every point on the supply curve indicates a price and a specific quantity supplied at that price.
Thus at price P2, you the producer were willing to supply quantity OQ2.
By extension, at price P3, quantity supplied will be OQ3.
But if the market equilibrium price is OP*, quantity supplied will be OQ*.
Thus we can conclude that producers are willing to supply the quantity OQ2 at price OP2.
Again if the market equilibrium price is OP*, then the entire quantity OQ* is sold at unit price OP*.
So we can say that the producer gets paid unit price OP* even for quantity OQ2.
Thus when the producer is fetching unit price OP* even for quantity OQ2, he is enjoying a producer surplus of P*P2 or BC price per unit.
That is the difference between the price (OP2) at which the producer was willing to sell (supply) the good and what he actually gets paid for it, OP*.
By extension the producer surplus per unit at quantity OQ3 is P3P* or DE.
Thus the total amount of producers surplus enjoyed by the seller is the whole area P*P1A, when the market equilibrium price is OP*.
The bottom line is that the producer surplus is the whole area above the supply curve up-to market price.
Here a country imports a good (say coffee), since the import /world price of coffee is lower than this country's domestic price.
Without coffee imports, the domestic price is OPA and quantity is OQA.
But the world price of coffee (which is the price at which this country can import coffee) is OPW.
If this country imports coffee at that price, then her domestic demand will be OQ2 (demand will increase because of the lower price) while domestic supply will fall to OQ1 (supply decreases with a fall in price).
The differential between domestic demand and domestic supply is Q1Q2, which is the amount of coffee imported.
So, because of coffee imports, consumers pay less for coffee, unit price PW, not PA.
Consumer surplus before coffee imports is BAPA, and BDPW after imports.
Thus consumer surplus increases by amount (a+b+c).
But since producers now get paid less (OPW instead of OPA unit price), thus producer surplus goes down from PAAE to PWFE, i.e., by amount (a).
So in the final analysis, the drop is producer surplus is (a), while the gain in consumer surplus is (a+b+c).
Thus imports increase national well-being by the amount (b+c).
Here a country exports a good (say coffee), since the export /world price of coffee is higher than this country's domestic price.
Without coffee exports, the domestic price is OPA and quantity is OQA.
But the world price of coffee (which is the price at which this country can export coffee) is OPW.
If this country exports coffee at that price, then her domestic demand will be OQ3 (demand will decrease because of the higher prices) while domestic supply will increase to OQ4 (supply increases with a rise in price).
The differential between domestic demand and domestic supply is Q3Q4, which is the amount of coffee exported.
So, because of coffee exports, consumers pay more for coffee, unit price PW, not PA.
Consumer surplus before coffee imports is DAPA, and DHPW after exports. Thus consumer surplus decreases by the amount (e+f). But since producers now get paid more (OPW instead of OPA unit price), thus producer surplus goes up from PAAC to PWBC or amount (e+f+g).
So in the final analysis, the increase in producer surplus is (e+f+g), while the drop in consumer surplus is (e+f).
Thus exports increase national well-being by the amount (g).
To see this we draw the demand and supply curve together in a market equilibrium set up.
The domestic price of coffee is P* and quantity Q*.
But the world price of coffee is PW.
Without the imposition of any tariffs, at price Pw, the domestic supply will be PwD, while the domestic demand will be PwA, and the differential AD or Q1Q2 is imported.
Thus consumer surplus (the whole area under the demand curve up-to market price) before imports was HAP*.
But after imports it is HGPw. So consumer surplus increases by P*AGPw (HGPw-HAP*).
Now the government imposes a tariff of "t" raising the price of coffee to Pw+t.
Thus now consumer surplus is HBPw+t.
So consumer surplus has decreased by Pw+tBGPw or area (1+2+3+4) due to the imposition of the tariff.
But on the other hand producer surplus has increased.
Before the tariff imposition it was area PwDI.
After the imposition of tariffs, it is now Pw+tCPw or an increase of area.
So we have three things happening after the imposition of tariffs.
1) A loss in consumer surplus of area “1+2+3+4"
Since loss is greater than the gain, area (2+4) is the net loss to society due to the imposition of the tariff.
This is called the "dead weight loss"due to tariffs.