Consumer Surplus

Consumer Surplus Graph

The consumer surplus graph can be illustrated using the demand curve. Here, we plot the price on the vertical axis, and the quantity demanded on the horizontal axis. Let's look at the consumer surplus graph in Figure 1, so we can continue from there.

Fig. 1 - Consumer surplus graph

As shown in Figure 1, the consumer surplus is the area above the price and below the demand curve. This is because the demand curve represents the demand schedule, which is the price of the good at each quantity. Consumers are willing to pay anything within the demand schedule until point A, and since they are paying P₁, they get to keep the difference between point A and P₁.

In the above example, the consumer surplus graph is as shown in Figure 2.

Fig. 2 - Consumer surplus with a price decrease

As shown in Figure 2, the triangle ABC represents the consumer surplus of all consumers who bought the product at P₁. When the price reduces to P₂, the consumer surplus of all the initial consumers now becomes the area of triangle ADF. Triangle ADF is the initial surplus of ABC with the additional surplus of BCFD. For new consumers who joined the market at the new price, the consumer surplus is triangle CEF.

Consumer Surplus Formula

To derive the formula for consumer surplus, the consumer surplus graph provides a vital clue. Let's look at the consumer surplus graph in Figure 3 below to help us derive the formula.

Fig. 3 - Consumer surplus graph

As you can see, the area shaded as the consumer surplus is a triangle ABC. This means that to calculate the consumer surplus, we simply need to find the area of that triangle. How do we do this?

We use the following formula:

\(Consumer\ surplus=\frac{1}{2}\times\ Q\times\ \Delta\ P\)

Where Q represents the quantity demanded and P is the price of the good. Note that the change in price here represents the maximum consumers are willing to pay minus the actual price of the good.

Let's try an example now!

Here's another example.

Let's illustrate the demand schedule for the above example in Table 1 and Figure 4.

Table 1. Market demand schedule

Based on Table 1, we can then draw Figure 4, as shown below.

Fig. 4 - Market consumer surplus graph

To determine the market consumer surplus, we look at the consumer surplus at each quantity and price. The first consumer has a surplus of $30 because they were willing to buy a piece of cake for $90 but got it for $60. The consumer surplus for the second consumer is $10 because they were willing to buy a piece of cake for $70 but got it for $60. The third buyer is willing to pay $60, but as the price is $60, they get no consumer surplus, and the fourth buyer cannot afford a piece of cake.

Based on the above, the market consumer surplus is:

\(\hbox{Market consumer surplus}=\$30+\$10=\$40\)

Consumer Surplus vs. Producer Surplus

What is the difference between consumer surplus vs. producer surplus? You must be thinking, if consumers have a surplus, then surely producers have one too. Yep, they do!

So, what is the difference between the consumer surplus and the producer surplus? The consumer surplus is the benefit of consumers when they purchase a good, whereas the producer surplus is the benefit of producers when they sell a good. In other words, the consumer surplus is the difference between how much the consumer is willing to pay for a good and how much is actually paid, whereas the producer surplus is the difference between how much a producer is willing to sell a good for and how much it actually sells for.

• The consumer surplus is the difference between how much the consumer is willing to pay for a good and how much is actually paid, whereas the producer surplus is the difference between how much a producer is willing to sell a good for and how much it actually sells for.

Just like the consumer surplus, the formula for the producer surplus is also as follows:

\(Producer\ surplus=\frac{1}{2}\times\ Q\times\ \Delta\ P\)

However, in this case, the change in price is the actual price of the product minus how much the producer is willing to sell it for.

So, let's summarize the main differences here:

1. The consumer surplus uses willingness to pay, whereas the producer surplus uses willingness to sell.
2. The producer surplus subtracts how much the producer is willing to sell an item for from the actual price, whereas the consumer surplus subtracts the actual price from how much the consumer is willing to pay.

Consumer Surplus Example

Now, let's look at a simple example of consumer surplus.