Course

Consumer Surplus

Instructor: Tyler Cowen, George Mason University

Consumer Surplus : The consumer’s gain from economic exchange. It is calculated by taking the difference between the maximum price a consumer is willing to pay and

Consumer Surplus: The consumer’s gain from economic exchange. It is calculated by taking the difference between the maximum price a consumer is willing to pay and the market price. This is from the video “A Deeper Look at the Demand Curve” in the Principles of Microeconomics course.

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Transcript

Consumer surplus is the consumer's gain from exchange. It's the difference between the maximum price that consumer is willing to pay for a given quantity, and the market price the consumer actually has to pay. Total consumer surplus is the sum of the consumer surplus of all buyers, and graphically, consumer surplus is measured by the area below the demand curve and above the price.


Again, that's a little bit mysterious and something of a mouthful, but with a diagram, I think this will become clearer. This will also give us a little bit of a chance to practice reading a demand curve vertically. So let's take a look.


Let’s begin as usual with the demand curve and let's pick a particular quantity. Let’s remember from our vertical reading that the height of the demand curve at that quantity gives the maximum willingness to pay for that particular barrel of oil. In this case, the maximum willingness to pay for the barrel of oil indicated is a little bit below $80.


Now suppose that the price of a barrel of oil is $20 per barrel. The willingness to pay is closer to 80, and the actual price is only 20. In other words, the person is required to pay 20 for something which they value at close to 80. The difference between the maximum willingness to pay and the actual price is again called consumer surplus. In this case, consumer surplus would be a little bit less than 60.


We can indicate the consumer surplus by this green area. That might be the consumer surplus of one particular person who happens to really value oil, and they value it a little bit less than 80, and they only have to pay 20, so their consumer surplus again is about 60.


Another consumer might value the oil less. They have a less value demand for the oil. Joe's consumer surplus is, let's say, down here. By adding up the consumer surplus for all consumers over all units, what we see is that the total consumer surplus is the area beneath the demand curve and above the price. We're just adding up the consumer surpluses for all individuals for all units of the good. In fact, we often want to get a measure of this.


When we have a linear demand curve it's easy to quantify this. Remembering from our high school geometry that the area of a triangle is equal to one half base times height, we can see that the total triangle here is 80 minus 20, so that's 60, times 90, divided by two, or 2,700. This would be in millions, 2.7 billion. That would be the total consumer surplus from this market for oil.


Again we'll be using this calculation quite often, so just remind yourself of how to calculate the are underneath the triangle, which I know you're all familiar with.

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