7.1 Consumer Surplus

7.1 a. Consumer Surplus and Willingness to pay

The amount above the actual price of a commodity a purchaser are willing to pay in order not to go without the commodity. ^[1]

Example: If an individual is willing to pay $100 but finds it at a lower price, the difference in between the two amounts is the consumer surplus

^{Consumer Surplus [2]}

7.1 b. Using the Demand Curve to Measure Consumer Surplus

Consumer surplus is measured as the area below the downward-sloping demand curve, depicted with a horizontal line drawn between the y-axis and demand curve. Consumer surplus can be calculated on either an individual or aggregate basis, depending on if the demand curve is individual or aggregated. Consumer surplus always increases as the price of a good falls and decreases as the price of a good rises. ^[3]

Example: Suppose an individual is willing to pay $50 for the first unit of product A and $20 for the 50th unit. If 50 of the units are sold at $20 each, then 49 of the units were sold at a consumer surplus, assuming the demand curve is constant. Consumer surplus is depicted as the triangle that forms between the following points on a graph: (0, 50), (0, 20) and (50, 20). The numerical value is calculated as half, or 0.50, multiplied by the base of the triangle multiplied by the height of the triangle, or 0.50*30*50 ^[3]

^{Measuring Consumer Surplus [4]}

7.1 c. Impacts of Price Changes on Consumer Surplus

Assuming that there is no shift in demand, an increase in price will therefore lead to a reduction in consumer surplus, while a decrease in price will lead to an increase in consumer surplus. However, consumer surplus will only increase as long as the benefits from a lower price exceeds the cost from the resulting shortage. ^[5]

Example: Consumer surplus always decreases when a binding price floor is instituted in a market above the equilibrium price. ^[5]

^{Consumer Surplus and Price Floors [5]}