What is consumer surplus?
Consumer surplus is an economic measure of consumer benefits. Consumer surplus occurs when the price consumers pay for a product or service is lower than the price they are willing to pay. It is a measure of the additional benefit that consumers receive because they pay less for something than they were willing to pay.
A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.
Many producers are influenced by the consumer surplus when setting their prices.
The basis for a consumption surplus
The concept of consumer surplus was developed in 1844 to measure the social benefits of public goods such as national highways, canals and bridges. It is an important tool in the area of welfare economics and the formulation of fiscal policies by governments.
The consumer surplus is based on the economic theory of marginal utility, which is the additional satisfaction that a consumer obtains from a unit of more than one good or service. The usefulness of a good or service varies from one individual to another depending on his personal preferences. In general, the more consumers have a good or service, the less willing they are to spend on more of it, because of diminishing marginal utility or the additional benefits they receive. .
Economic well-being is also called community surplus, or the total surplus of consumers and producers.
Measuring consumer surplus with a demand curve
The demand curve is a graphical representation used to calculate the consumer surplus. It shows the relationship between the price of a product and the quantity of the product requested at that price, with the price plotted on the y-axis of the graph and the quantity requested, drawn on the x-axis. Due to the law of decreasing marginal utility, the demand curve slopes downward.
Consumer surplus is measured as the area below the downward-sloping demand curve, or the amount that a consumer is willing to spend on given quantities of a good, and above the actual price of the product. good market, represented by a horizontal line drawn between the y-axis and the demand curve.
Consumer surplus can be calculated on an individual or aggregated basis, depending on whether the demand curve is individual or aggregated. The consumer surplus always increases when the price of a good falls and decreases when the price of a good increases.
For example, suppose consumers are willing to pay $ 50 for the first unit of product A and $ 20 for the 50th unit. If 50 units are sold at $ 20 each, 49 units are sold with a consumer surplus, assuming the demand curve is constant.
The consumer surplus is zero when the demand for a good is perfectly elastic. But demand is perfectly inelastic when the consumer surplus is infinite.
Key points to remember
- Consumer surplus occurs when the price consumers pay for a product or service is lower than the price they are willing to pay.
- Consumer surplus is the benefit or the good feeling of getting a good deal.
- The consumer surplus always increases when the price of a good falls and decreases when the price of a good increases.
Real example of excess consumption
Consumer surplus is the benefit or the good feeling of getting a good deal. For example, suppose you bought a plane ticket for a flight to Disney during the school vacation week for $ 100, but you expected and wanted to pay $ 300 for a ticket. The $ 200 represents your consumer surplus.
However, companies know how to transform consumer surplus into producer surplus or for their profit. In our example, suppose the airline realizes your surplus and the calendar is approaching the week of school holidays, it increases the price of its tickets to $ 300 each.
The airline knows that there will be an increase in demand for Disney travel during the school holiday week and that consumers will be willing to pay higher prices. Thus, by increasing the price of tickets, the airlines take the consumer surplus and transform themselves into producer surplus or additional profits.