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Consumer Surplus
Definition, Measurement,
Table of Contents
What Is Consumer Surplus?
and Example
Understanding Consumer
By CHRIS B. MURPHY Updated March 19, 2023
Surplus
Reviewed by MICHAEL J BOYLE
Formula
Fact checked by DIANE COSTAGLIOLA
Measuring Consumer
Surplus

Example

Consumer Surplus FAQs

The Bottom Line

What Is Consumer Surplus?

Consumer surplus is an economic measurement of consumer benefits
resulting from market competition. A consumer surplus happens when the
price that consumers pay for a product or service is less than the price they're
willing to pay. It's a measure of the additional benefit that consumers receive
because they're paying less for something than what they were willing to pay.

Consumer surplus may be compared with producer surplus.

KEY TAKEAWAYS
A consumer surplus happens when the price consumers pay for a
product or service is less than the price they're willing to pay.
Consumer surplus is based on the economic theory of marginal
utility, which is the additional satisfaction a consumer gains from one
more unit of a good or service.
Consumer surplus always increases as the price of a good falls and
decreases as the price of a good rises.
It is depicted visually by economists as the triangular area under the
demand curve between the market price and what consumers would
be willing to pay.
Consumer surplus plus producer surplus equals the total economic
surplus.

Investopedia / Crea Taylor

Understanding Consumer Surplus

The concept of consumer surplus was developed in 1844 to measure the
social benefits of public goods such as national highways, canals, and bridges.
It has been an important tool in the field of welfare economics and the
formulation of tax policies by governments.

Consumer surplus is based on the economic theory of marginal utility, which

is the additional satisfaction a consumer gains from one more unit of a good
or service. The utility a good or service provides varies from individual to
individual based on their personal preference.

Typically, the more of a good or service that consumers have, the less they're
willing to spend for more of it, due to the diminishing marginal utility or
additional benefit they receive. A consumer surplus occurs when the
consumer is willing to pay more for a given product than the current market
price.

Important: Many producers are influenced by consumer surplus

when they set their prices.

The Formula for Consumer Surplus

Economists define consumer surplus with the following equation:

Consumer surplus = (½) x Qd x ΔP

where:

Qd = the quantity at equilibrium where supply and demand are equal

ΔP = Pmax – Pd, or the price at equilibrium where supply and demand are
equal
Pmax = the price a consumer is willing to pay

Measuring Consumer Surplus

The demand curve is a graphic representation used to calculate consumer
surplus. It shows the relationship between the price of a product and the
quantity of the product demanded at that price, with the price drawn on the y-
axis of the graph and the quantity demanded drawn on the x-axis. Because of
the law of diminishing marginal utility, the demand curve is downward
sloping.

Consumer surplus is measured as the area below the downward-sloping

demand curve, or the amount a consumer is willing to spend for given
quantities of a good, and above the actual market price of the good, depicted
with a horizontal line drawn between the y-axis and demand curve. Consumer
surplus can be calculated on either an individual or aggregate basis,
depending on if the demand curve is individual or aggregated.

Consumer surplus always increases as the price of a good falls and decreases
as the price of a good rises. For example, suppose consumers are willing to
pay $50 for the first unit of product A and $20 for the 50th unit. If 50 of the
units are sold at $20 each, then 49 of the units were sold at a consumer
surplus, assuming the demand curve is constant.

Consumer surplus is zero when the demand for a good is perfectly elastic. But
demand is perfectly inelastic when consumer surplus is infinite.

Consumer Surplus. Chris B Murphy

FAST FACT
Economic welfare is also called community surplus, or the total of
consumer and producer surplus.

Example of Consumer Surplus

Consumer surplus is the benefit or good feeling of getting a good deal. For
example, let's say that you bought an airline ticket for a flight to Disney World
during school vacation week for $100, but you were expecting and willing to
pay $300 for one ticket. The $200 represents your consumer surplus.

However, businesses know how to turn consumer surplus into producer

surplus or for their gain. In our example, let's say the airline realizes your
surplus and as the calendar draws near to school vacation week raises its
ticket prices to $300 each.

The airline knows there will be a spike in demand for travel to Disney World
during school vacation week and that consumers will be willing to pay higher
prices. So by raising the ticket prices, the airlines are taking consumer surplus
and turning it into producer surplus or additional profits.

Is a High Consumer Surplus Good?

A high consumer surplus means that goods are priced quite a bit lower in the
market than where consumers would ultimately be willing to pay. This is often
the result of a high degree of competition, technological progress, and
producer efficiency. In general, all of these things are considered to be "good"
for promoting economic growth and prosperity.

What Is Producer Surplus?

Similar to consumer surplus, producer surplus is the economic benefit to
producers of goods measured by the difference in market price and where the
producer would be willing to sell. A producer surplus thus exists if the market
price of a good is higher than the price the producer is willing to sell.
 What Is Total Economic Surplus?
Total economic surplus is equal to the producer surplus plus the consumer
surplus. It describes the total net benefit to society from free markets in
goods or services.

The Bottom Line

In free markets, producers compete with one another to be the low-cost
producer and grab market share from other companies in their space. The
result is more quantity and lower prices for consumers, often lower than
where they would be willing to pay for it. This difference between the market
price (as determined by supply and demand) and the willingness to pay is the
consumer surplus. A consumer surplus is seen as a benefit to the economy.

PART OF

Practical Look At Microeconomics

T LY RE AD ING
U P NE XT

sumer Surplus
What Is Comparative What Are Economies of Perfect Competition: W
nition,
Advantage? Scale? Examples and How It H
surement, and
Works
mple
0 36 of 40 37 of 40 38 of 40 39

Related Terms
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Work?
The law of demand states that quantity purchased varies inversely with price. In other
words, the higher the price, the lower the quantity demanded. more

Demand Theory: Definition in Economics and Examples

Demand theory is a principle relating to the relationship between consumer demand for
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and Use
The quantity supplied is a term used in economics to describe the number of goods or
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Marginalism is an economic principle that decisions and adjustments to economic
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Buyer's Monopoly: What it Means, How it Works

A buyer's monopoly, or monopsony, is a market situation where there is only one buyer
of a good, service, or factor of production. more

Price Sensitivity: What It Is, How Prices Affect Buying

Behavior
Price sensitivity is the degree to which the price of a product or service influences
consumer purchases. more

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