Consumer surplus From Wikipedia, the free encyclopedia

Graph illustrating consumer (red) and producer (blue) surpluses on a supply and demand chart Consumer surplus or Consumer's surplus (or in the plural Consumers' surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. The gain is the difference between the price they are willing to pay (or reservation price) and the actual price. If someone is willing to pay more than the actual price, their benefit in a transaction is how much they saved when they didn't pay that price. The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on a supply and demand figure. If demand is as given as the diagonal line from the price axis to the quantity axis, consumers' surplus in the case of a the initial supply curve (S0) is the triangle above the line formed by price P0 to the demand line (bounded on the left by the price axis and on the top by the demand

line). If supply expands (to S1), the consumers' surplus expands, to the triangle above P1 and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply. Contents

Distribution of benefits Rule of one-half Comparison to profit History See also

Distribution of benefits The benefits can be thought to accruing to two groups. The first, those who were willing to pay the higher price P0, benefit because of a price reduction. Their benefit is the area in the rectangle formed on the top by P0, on the bottom by P1, on the left by the price axis and on the right by line extending vertically upwards from Q0. The second set of beneficiaries are new consumers, those who will pay the new lower price (P1) but not the higher price (P0), and are measured as the difference between Q1 and Q0. Their benefit is the triangle formed by on the left by the line extending vertically upwards from Q0, on the right by the demand line, and on the bottom by the line extending horizontally to the right from P1. Rule of one-half The rule of one-half estimates the change in consumers' surplus for small changes in supply with a constant demand curve. Following the figure above,

where:

CS = Consumers' Surplus Q0 and Q1 are the quantity demanded before and after a change in supply P0 and P1 are the prices before and after a change in supply

Comparison to profit In terms of supply and demand, consumer's surplus is the analog to profit (or producer's surplus) (which is the difference between price and cost). History The idea of consumer's surplus was due to Jules Dupuit and extended by Alfred Marshall.