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Consumer Surplus

Is the willingness of the consumer to pay for a good minus the price actually paid for the good.

Consumer Surplus = Willing Price – Price Actually Paid

For example, if a product has a market price of £7 and the consumer is willing to pay £10m then the consumer surplus is £3 (£10-£7).

On a graph the consumer surplus can be shown as the triangle to the left of the demand curve and above the market price. This is because the consumer would have been willing to spend above this price for the good and yet they can actually but it cheaper.

If the demand curve is perfectly elastic then consumer surplus will equal 0. This is because they would only be willing to buy the product at a certain price and hence wouldn't pay more or less and so there wouldn't be a consumer surplus. On the other hand if the demand curve is perfectly inelastic then the consumer surplus will be infinite.

The red triangle is a consumer surplus. This is because some people would have been willing to buy the product at a higher price, because they got it for less (the market price) they will have a consumer surplus.

If there is a shift in the demand curve then the consumer surplus will change. If there is a rightward shift (shown) in the
 demand curve, ceteris paribus, the consumer surplus will increase. If there is a leftward shift in the demand curve then consumer surplus will decrease.

From the graph to the right we can see that the original consumer surplus is the yellow triangle. The demand curve shifts rightward from D1 to D2. Therefore the price increases from P1 to P2 and the consumer surplus is now the red triangle. We can see that this is larger than the yellow triangle, hence consumer surplus has increased.

A rightward shift in the supply curve would also cause an increase in consumer surplus and vice versa.

Effects of consumer surplus might be that it encourages people to spend more. They may receive a feel-good factor from the surplus as they feel like they have saved money. This may lead them to spend it (if it is at the same company then they may receive a boost to profits) as they feel that they were going to spend it anyway, why not get an additional product/service out of it. It might also encourage the consumer to go back to the firm as it gives them a good reputation for offering cheap products (since you as a consumer believed it would be more expensive).

Page last updated on 20/10/13