Consumer Surplus

What is consumer surplus? Consumer surplus is the consumer's gain from exchange. It's the difference between the maximum price that the consumer is willing to pay for a given quantity and the market price the consumer actually has to pay. And total consumer surplus is the sum of the consumer surplus for all buyers in a market. We'll look at an example using the demand for concert tickets.

Let's begin, as usual, with the demand curve, and pick a particular quantity. Remember, from a vertical reading, that the height of the demand curve at that quantity gives the maximum willingness to pay for that particular concert ticket. In this case, let's say your maximum willingness to pay for a concert ticket is a little under $80. Now suppose the price of the concert ticket is $20. Your willingness to pay is closer to $80, and the actual price is only $20. In other words, you're required to pay $20 for something you value at close to $80. What a deal! The difference between your maximum willingness to pay and the actual price is called consumer surplus. In this case, your consumer surplus would be a little bit less than $60. We can indicate your consumer surplus by this green area, which is about $60. But not everyone's willing to pay $80 for a ticket. Your friend might value a concert ticket at only $30. Her consumer surplus is down here.

By adding up the consumer surplus for all consumers, over all units, what we see is that the total consumer surplus is the area beneath the demand curve and above the price. We're just adding up the consumer surpluses for all individuals, for all units of the good. In fact, we often do want to get a measure of this. If demand is linear, we can use the formula for a triangle to calculate consumer surplus, which is ½ (base x height). So base is 90, and the height is 80 minus 20, or 60. So ½ of (90 x 60) is 2,700. $2,700 is total consumer surplus for this market. But consumers aren't the only ones with surplus.