Consumer Surplus Definition
The consumer surplus is the economic welfare that consumer gets by consuming the products. The difference between the price of the product and the price that the consumer is willing to pay for that product is known as consumer surplus. This is the economic benefit to consumers because they pay less than what they are willing to pay.
The consumer surplus arises when the consumer is willing to pay more as compared to the market price for a specific product.
“Consumer surplus is the difference between the total amount that consumers are willing to pay for service or good and the total amount that they do pay.”
Consumer Surplus Formula
Consumer Surplus = Consumer Willingness to Pay – Market or Actual Price
Consumer Surplus Example with Diagram
When consumers leave home or visit the market to buy something, they prepared their mind that if the requisite product will be up to a certain price level then they will buy it and in actual they face either higher or lower market price.
To make things understandable, let take an example of soya beans. Let assume the consumer Mr. Clarke, when Mr. Clarke made his mind to buy soya beans he has prepared his mind that if its price is up to 9 USD per Kg then he will buy otherwise not. When he visited the market and came to know that the market price of soya beans is 6 USD per Kg and bought it.
Now the question arises how much is consumer surplus? So, the consumer surplus is 3 USD (9$-6$ = 3$).
The above figure shows that the consumer is willing to pay OBEC but he is paying OA to buy OC quantity of the product or area OAEC. The area OBEC is greater than area OAEC that means consumer is getting benefit and the net benefit to the consumer is area ABE. So, the area ABE is representing consumer surplus.
We can define the consumer surplus as
The area under the demand curve but above the price level is known as consumer surplus.
Consumer Surplus and Marginal Utility
A positive relationship has been seen between consumer surplus and a marginal utility which means by the decrease in the marginal utility the consumer surplus also decreases and vice versa.
Keep in mind that when you utilize something first piece of that product gives you a higher level of satisfaction and afterward it will follow a declining trend.
Let take an example to clarify the concept, Mr. Clarke is hungry, wants to buy a hot dog and willing to pay 5 USD for it. But the actual price of a hot dog is 3 USD now he is facing a consumer surplus of 2 USD. After eating one hot dog his marginal utility declined and now he is willing to pay 4 USD but find the hot dog is 3 USD now consumer surplus is 1 USD if he ate more his willingness to pay goes down and a point comes where his willingness to pay will be same as market price level.
Consumer Surplus Calculator
Here in the below table you can put the price you are willing to pay and actual price then the consumer surplus calculator will give you results.
|Consumer Surplus Formula =||Maximum Price Willing to Pay – Actual Price|
|0 – 0 =||0|
Consumer Surplus Formula in Calculus
The below figure represents the estimation of consumer surplus, which is the difference between the price a consumer is willing to pay and the actual market price.
The area under the demand curve from the origin shows that consumer’s ability or willingness to pay and the are under the demand curve but above the price level shows the consumer surplus. The calculus formula of consumer surplus is mentioned with the all figure.
Can Firms Reduce Consumer Surplus?
- If the company or firm can control the market price, then they increase the price above the market price to reduce the consumer surplus. Consequently, we may say that firms can reduce consumer surplus if they have the power to control the prices. In the case of a monopoly, the firm converts the consumer surplus into producer surplus because of market power.
- Price discrimination is another policy to reduce the consumer surplus, in which different prices have been charged from different groups of people. Like high price would be charged to consumers with inelastic demand. For this situation, firms used first-degree price discrimination- which means charge high price than they are willing to pay.
- To make demand more inelastic, gain market power, charge higher, and reduce consumer surplus firms focus on brand loyalty through marketing skills like an advertisement, etc.
What is the significance of consumer surplus?
- If consumers are facing consumer surplus then their purchasing circle becomes wider means they can buy a wider range of products.
- The inequality is caused by the increasing difference between consumer and producer surplus. The higher the producer surplus caused high inequality and the lower the producer surplus caused low inequality and vice versa from the consumer side.
- In competitive markets, the firms charge low prices that caused more consumer surplus while in less competitive markets the firms charge higher prices and enabling the consumer to reduce its surplus.