Consumer Surplus - Explained
What is a Consumer Surplus?
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Table of ContentsWhat is a Consumer Surplus?Why is Consumer Surplus Important?Using the Demand Curve to Calculate Consumer SurplusIllustration of Consumer SurplusAcademic Research on Consumer Surplus
What is a Consumer Surplus?
A consumer surplus occurs when a consumer is willing and able to offer more for a particular product that is readily available at a given cost. This economic measurement of consumer benefits occurs when a consumer is paying less than he or she is willing to offer for a particular product at a given period. It implies the additional gain which a consumer earns wince he or she gets to pay lesser than what they expected and are willing to. If the market price of a product is $30, and consumers are generally willing to pay $45 for that product, then the surplus would be the additional $15 which consumers are willing to give up, and which the product is not commanding.
Why is Consumer Surplus Important?
Introduced in 1844, the concept of consumer surplus was established to calculate the benefits derived from public goods such as national highways, canals, and bridges, among others. This concept is widely used in tax policies as well as in macroeconomics or economics that caters to the masses. This concept is based on marginal utility, which refers to the extra satisfaction (or utils) which a buyer derives from consuming one extra unit of a particular product in a given period. The preference scale in microeconomics helps us to see how consumers derive this extra satisfaction as desires are different in various individuals. Using the law of diminishing marginal utility, it is accurate to say that the more of an item which a person has, the lesser he or she would want to spend to obtain extra units of it, as theyd gain less satisfaction from every additional unit till a point that satisfaction would remain stagnant or decline.
Using the Demand Curve to Calculate Consumer Surplus
The demand-and-supply model allows the demand curve to work for the supply curve and vice versa. Consumer surplus can be measured using this curve, which portrays a graphical representation of the relationship between price and the orders made for a product at that price. The demand curve uses two axes; the X and Y axes. The y-axis represents the market price of a product, while the x-axis represents the quantity demanded at each price. Due to the law of diminishing marginal returns, the demand curve slopes downward from left to right. To measure consumer surplus, one must look at the area below the demand curves downward sloping and the price which consumers are willing and able to offer for goods and services. It is also important to look above the market value of the commodity, which is represented by a horizontal line between the price section (y-axis) and the demand curve. Consumer surpluses, most of the times, increases when the prices of goods fall considerably, and reduces if inflation were to occur. Economists can decide to calculate consumer surplus on an aggregate level (taking a range of samples) or individual levels depending on the type of curve; whether personal or aggregated. To better illustrate this concept, let us assume that a buyer name John is willing to pay $36 for the first batch of shampoos from his supplier, and $24 for the second batch of shampoos. In a situation where each batch contains 30 units, and 30 are sold for $24, we can say that 29 of them are sold at the consumer surplus if the demand curve was to be constant. Quick Note
- When consumers pay less than they are willing to for a particular product, then it is referred to as consumer surplus.
- This surplus is the benefit of getting a deal for lesser than what was budgeted.
- Consumer surplus is based mostly on price, an increase in price decreases it, while a decrease in price increases it.
Illustration of Consumer Surplus
Assume you budgeted $500 for a new Gucci Sandal, and on getting to the retailer, you found out that the shoe costs $350. The extra $150 is defined as the consumer surplus and gives a good feeling to the buyer. Businesses have, however, devised means to manipulate consumer surplus and turn it into manufacturers surplus to maximize profits. Now imagine you budgeted $500 for your Gucci shoe during the Christmas period. Firms, on knowing the general preference of consumers during this period will increase the price to $500 for each pair of these designer wears. This way, these shoe retailers are turning your supposed $150 consumer surplus into their $150 producer surplus.
Academic Research on Consumer Surplus