Consumer Surplus
What is Consumer Surplus?
Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they pay.
It measures the net benefit consumers receive from buying a good or service. On a demand curve, it is the area below the demand curve and above the price paid, up to the quantity purchased.
Consumer Surplus: a worked example
Suppose market demand is P = 20 − Q and the price settles at $8, so buyers purchase 12 units. The demand curve's vertical intercept is $20, the choke price above which no unit is bought at all, so consumer surplus is the triangle ½ × 12 × ($20 − $8) = $72. A single buyer who was willing to pay $15 but pays $8 personally captures $7 of that $72.
The mistake students make with consumer surplus
Students compute the whole area under the demand curve out to the quantity bought and call that consumer surplus, but that area is total willingness to pay. Consumer surplus is what is left after subtracting the price × quantity rectangle that buyers actually hand over, so it is only the area below demand and above the price line.
Consumer Surplus questions
How do you calculate consumer surplus?
Consumer surplus is the area below the demand curve and above the market price, up to the quantity bought, which for a straight-line demand curve equals ½ × quantity × (the demand curve's vertical intercept minus the price paid). With demand P = 20 − Q and a price of $8, quantity is 12 and consumer surplus is ½ × 12 × $12 = $72.
What happens to consumer surplus when the price falls?
A fall in price raises consumer surplus, because every buyer who was already purchasing now pays less on each unit and additional buyers enter the market. The gain equals the savings on the units already being bought plus the new surplus on the extra units.
What is the difference between consumer surplus and total revenue?
Consumer surplus is the buyers' net gain, the value they place on the units minus the money they pay, while total revenue is price × quantity, the money sellers receive. They are separate areas on the same graph: surplus sits above the price line and below demand, revenue sits below the price line.
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Related terms
The same idea in another course
The same area, set up as an integralConsumer surplus is an area between two curves, the demand curve and the price line, which is the standard integral set-up in calculus. On CalcLearn, a sister site.
Common comparisons
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