VC GLOSSARY

Consumer surplus is a measure of the excess benefit that consumers can receive. It occurs only when the price a consumer is willing to pay for a product or service is higher than the price they actually pay. 

The simple consumer surplus formula is:

Consumer surplus = maximum price willing to pay - actual price

To demonstrate this formula in action, let’s look at an example. Michael wants to purchase a 2020 Honda Civic. He’s willing to pay up to $25,000, which is his maximum price willing to pay. He heads to the dealership to browse his options and sees the exact car he’s looking for.

It is listed at $20,000, which is the actual price. Michael purchases the car at this price and has a consumer surplus of $5,000. This is calculated by subtracting the price paid from the price Michael was willing to pay.

There is a more complex consumer surplus formula. It is used when calculating consumer surplus from a supply and demand curve. This formula is:

Let’s look at an example of how to use the extended consumer surplus formula. Shelby wants a new desk chair and is willing to pay $100. The equilibrium price for desk chairs is $50. At this price, 200 desk chairs are available.

The number of chairs demanded at equilibrium is 200. The price the buyer is willing to pay is $100. The price at equilibrium is $50.

Here’s how to calculate the consumer surplus in this example:

Begin by multiplying (½) by Qd (200) to equal 100. Next, subtract the price the buyer is willing to pay (100) by the price at equilibrium (50) to get a change in price of 50. Finally, multiply the 100 calculated in step one by the change in price of 50 to get a consumer surplus of $500.

A consumer surplus is the benefit received from buyers when they get to pay less than the maximum price they're willing to pay. A producer surplus occurs when the price producers receive for a good or service exceeds the minimum price they're willing to sell it for.

The relationship between consumer surplus and marginal utility impacts pricing decisions. The formula for consumer surplus is based on the theory of marginal utility. Marginal utility is the added benefit a buyer gets from purchasing one additional unit of a good or service. It diminishes over time, meaning the more units a buyer purchases of something, the less utility each additional unit provides.

It explains how one consumer can have a different spending preference after purchasing one unit. For example, one buyer could be willing to pay $1,000 for a new television. He or she may then only be willing to pay $800 for an additional television of the same type. This will result in a different consumer surplus.

Consumer surplus measures the excess benefit consumers can receive. It's calculated by subtracting the actual price from the maximum price willing to pay. Consumer surplus is different from a producer surplus in that it benefits the buyers, not the sellers. The theory of diminishing marginal utility plays an important role in consumer surplus results.

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