Consumer’s Surplus

Consumer’s Surplus refers to the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay in the market.

In essence:

 Consumer’s Surplus = Total Willingness to Pay − Actual Expenditure 

It is a measure of consumer welfare or economic benefit, representing the extra satisfaction (monetary value) consumers receive over and above what they actually pay.

Graphical Representation

Consumer’s surplus is visually represented in a demand and supply diagram:

• It is the area below the demand curve (which reflects willingness to pay)

• And above the equilibrium price line

• From zero to the quantity purchased

Illustration:

• The market equilibrium price (Pe​) is determined by the intersection of the demand and supply curves.

• The area between the demand curve and the horizontal line at Pe​ (up to equilibrium quantity Qe​) is the consumer surplus.

Effect of Price Changes:

• As the market price decreases, consumer surplus increases because:

    ○ More units are bought at a lower price.

    ○ The difference between willingness to pay and actual price widens.

Formula for Consumer’s Surplus

Where:

• Pe​ = Market equilibrium price (constant)

• Qe​ = Equilibrium quantity purchased

• D(x) = Demand function (maximum willingness to pay per unit)

Explanation:

•= Total willingness to pay (sum of maximum prices for all units bought)

• Pe Qe ​ = Total actual expenditure (price × quantity)

• The difference between the two = Consumer’s Surplus