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. The concept of consumer surplus was developed in 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. 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 price drawn on the y-axis of the graph and 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. Economic welfare is also called community surplus, or the total of consumer and producer surplus. Consumer surplus always increases as the price of a good falls and decreases as the price of a good rises. 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 is the benefit or good feeling of getting a good deal. However, businesses know how to turn consumer surplus into producer surplus or for their gain. 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. Behavioral Economics. Actively scan device characteristics for identification.
Use precise geolocation data. Select personalised content. I think the crux of the issue that some in this thread point to is this definition, which is presented differently by different economics courses and schools of thought:.
And Robert Johnson just above demonstrates some of the absurdity that comes of collapsing willing and able. But non-monetary costs—depreciation, etc. I think, here, that you are expecting consumer surplus to do more than it can possibly do. I think David said it well. Minus whatever I paid for the bread. I was willing to pay everything I had, and I paid that. I get all the future utility from staying alive, as you say but consumer surplus is zero because I have no left-over money.
Consumer surplus! Henderson is saying also. Robert Johnson, if you get it, then why does it trouble you so much? By the way, consumer surplus is related to utility — the reason we care when consumer surplus rises is that then people have more money or bartered goods to spend on something else, and that something else will presumably bring them utility.
Consumer surplus is determined by the alternatives consumers have — their opportunity costs. As Philo points out, your alternatives to buying aspirin determine your consumer surplus, not your total enjoyment of the product. A person will only be willing to pay as much the subjective value between one good and the next best alternative they have.
If someone offers you a Snickers bar or nothing, your consumer surplus is the value of the snickers bar. Generally, I think that consumer surplus is a very important notion, but I am wary of trying to quantify it in dollars or otherwise. I wonder if David Henderson agrees. The CS is zero in the bread example, but the starving man gets near infinite utility.
CS is dependent on the alternatives people face. Strangely enough, the better alternatives someone has, the lower their CS, but choices left untaken have no impact at all on utility. Willingness to pay is not a good measure of how much someone values something because of budget constraints, as you note. Clarification on Consumer Surplus Categories: Business Economics. Suggestions for how to solve this problem? Daniel Kuehn Feb 1 at pm. Robert Johnson Feb 1 at pm.
Henderson, Thanks for replying to my question. Thank you! MikeDC Feb 1 at pm. For information on Austin speaking, contact the Leigh Bureau. Austin Frakt. That is, consumer surplus has a log-sum of exponentials form. The derivative of consumer surplus is negative the demand function, i.
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