Consumer Surplus

Definition of Consumer Surplus

Consumer surplus is the difference between the value of something to a consumer and what they have to pay for it

Why Consumer Surplus Matters

Markets would not exist if people were not able to get a surplus from trade. They would have no incentive to trade!

Simple Example of Consumer Surplus

You are such a huge fan of your favorite musical performer that you would pay $200 to see them live in concert. But the ticket price is only $120. So when you buy the ticket and see the show you receive a consumer surplus of $80. That is, the value you got is $80 greater than the value you gave up (the value you gave up is the value you could have received by spending the $120 on the next best alternative). This is an example of a gain from trade.

Calculation of Consumer Surplus

The maximum a person is willing to pay for a good (the amount they value it) is called their reservation price. The consumer surplus is the difference between the reservation price and the price they have to pay.

Consider the following demand schedule:

Consumer Reservation Price
Abby $200
Bill $180
Charles $140

If the market price is $120, the three buyers in this market each receive a surplus:

Consumer Reservation Price Market Price Consumer Surplus
Abby $200 $120 $80
Bill $180 $120 $60
Charles $140 $120 $20
Total Consumer Surplus $160

Graphical Representation of Consumer Surplus

A demand curve shows the relationship between the price and the quantity demanded in a market. The consumer surplus is the area between the demand curve and a horizontal line showing the market price.

For the demand schedule above, the relationship between price and quantity demanded is:

Price Quantity Demanded
$200 1
$180 2
$140 3

If the market price is $120, the total consumer surplus is shown graphically by the light blue shaded area below:

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License