consumer surplus problem solving

Supply and Demand: Consumer Surplus

Supply and demand: consumer surplus #.

Understand concepts of consumer and producer surplus

Use definite integrals to solve problems involving consumer and producer surplus

Economists will often refer to supply and demand curves.

A supply curve is a cost of production function that relates some quantity of goods to a price that attracts this amount at market.

A demand curve is a function that relates a quantity of goods to a price that the market would be cleared of that quantity.

For example, suppose we have a supply curve \(S\) as:

and a demand curve \(D\) of:

We can plot these as follows.

Equilibrium Price #

Where the Supply and Demand curves intersect, we have the equilibrium price for the good under consideration. In order to find this value, we need to solve the equation:

We can use Sympy to accomplish this with the Eq and Solve commands or scratch this out by hand.

Now, we can update our plot to include this point and add some text and an arrow pointing to the equilibrium point using the matplotlib’s annotate function. The draws an arrow with some text to a point on the graph.

Price Discrimination #

Price discrimination refers to the different prices that different consumers are willing to pay for the same product. For example, some people may be willing to pay $16 for a six pack of beer while others would refuse. In order to address different consumers, a corporation might do something like market the same beer under a different logo and name in different kinds of stores.

If the goods producer is able to determine this perfectly, they will have achieved perfect price discrimination . The beer example demonstrates only a partial price discrimination. An example of perfect price discrimination might be a pay what you want approach where each consumer determine their own price for a good.

In a partial price discrimination scenario, we would have a picture like our step functions, where the width of each rectangle represents a quantity of a good and the height represents the price that this amount of goods sells for.

Let’s visualize the Partial and Perfect Price discrimination situation where we have \(\Delta q = 1\) .

The area of one of the rectangles then represents the revenue to the producer. Consider the first rectangle. Here, we have 1 unit of a good and sell this at 400 dollars. Similarly, we sell a second unit of this good for 300. From these sales we would have made 700 in total.

Perfect Price Discrimination would be modeled by the continuous case and the Revenue by the Definite Integral.

The Consumer Surplus #

When a marketplace finds consumers paying the same price for a good, we are at the equilibrium price . Here, if you think about moving backwards from equilibrium, the price of the good rises, its suppy falls, and there are fewer transactions. Another way to interpret the area under the Demand curve, is as the value to consumers.

If there is a difference between this value and what the consumers end up paying, we have a consumer surplus. This is represented graphically as the area determined by the rectangle formed by the equilibrium price. The difference between the area under the Demand curve and this rectangle is the consumer surplus .

This would be determined by the area under the Demand Curve, but above the horizontal line formed by the equlibrium price( \(p^\star\) ). Thus, we can represent this with the definite integral:

Suppose the supply curve is approximated by the function

and the demand curve by the function

for \(0 \leq q \leq 65,000\) . Determine the equilibrium price and Consumer Surplus.

If a supply curve is modeled by the equation \(p = 200 + 0.2x^{3/2}\) , find the producer surplus when the selling price is $400.

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In this video we introduce the math related to consumer surplus. Here, we walk through how to actually calculate consumer surplus.

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What Is Consumer Surplus?

Understanding consumer surplus, measuring consumer surplus.

• Consumer Surplus FAQs

The Bottom Line

Consumer surplus definition, measurement, and example.

Diane Costagliola is a researcher, librarian, instructor, and writer who has published articles on personal finance, home buying, and foreclosure.

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• Understanding Microeconomics vs. Macroeconomics
• Differentiate Between Micro and Macro Economics
• Microeconomics vs. Macroeconomics Investments
• Introduction to Supply and Demand
• Is Demand or Supply More Important to the Economy?
• Law of Demand
• Demand Curve
• Law Of Supply
• Supply Curve
• Price Elasticity of Demand
• Understanding Elasticity vs. Inelasticity of Demand
• Factors Determining the Demand Elasticity of a Good
• What Factors Influence a Change in Demand Elasticity?
• What Is the Concept of Utility in Microeconomics?
• What Is the Utility Function and How Is it Calculated?
• Total Utility
• Marginal Utility
• Law Of Diminishing Marginal
• What Does the Law of Diminishing Marginal Utility Explain?
• Economic Equilibrium
• Income Effect
• Indifference Curve
• Consumer Surplus CURRENT ARTICLE
• Comparative Advantage
• Economies of Scale: What Are They and How Are They Used?
• Perfect Competition
• Invisible Hand
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Consumer surplus is an economic measurement of consumer benefits resulting from market competition. A consumer surplus happens when the price that consumers pay for a product or service is less than the price they're willing to pay. It's a measure of the additional benefit that consumers receive because they're paying less for something than what they were willing to pay.

Consumer surplus may be compared with producer surplus .

Key Takeaways

• A consumer surplus happens when the price consumers pay for a product or service is less than the price they're willing to pay.
• Consumer surplus is based on the economic theory of marginal utility, which is the additional satisfaction a consumer gains from one more unit of a good or service.
• Consumer surplus always increases as the price of a good falls and decreases as the price of a good rises.
• It is depicted visually by economists as the triangular area under the demand curve between the market price and what consumers would be willing to pay.
• Consumer surplus plus producer surplus equals the total economic surplus.

Investopedia / Crea Taylor

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 has been an important tool in the field of welfare economics and the formulation of tax policies by governments.

Consumer surplus is based on the economic theory of marginal utility , which is the additional satisfaction a consumer gains from one more unit of a good or service. The utility a good or service provides varies from individual to individual based on personal preference.

Typically, the more of a good or service that consumers have, the less they're willing to spend for more of it, due to the diminishing marginal utility or additional benefit they receive. 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 consumer surplus when they set their prices.

The Formula for Consumer Surplus

Economists define consumer surplus with the following equation:

Consumer surplus = (½) x Qd x ΔP

• Qd = the quantity at equilibrium where supply and demand are equal
• ΔP = Pmax (the price a consumer is willing to pay) – Pd (the price at equilibrium where supply and demand are equal)

The demand curve is a graphic representation used to calculate consumer surplus. It shows the relationship between the price of a product and the quantity of the product demanded at that price, with the price drawn on the y-axis of the graph and the quantity demanded drawn on the x-axis. Because of the law of diminishing marginal utility, the demand curve is downward sloping.

Consumer surplus is measured as the area below the downward-sloping demand curve, or the amount a consumer is willing to spend for given quantities of a good, and above the actual market price of the good, 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. For example, suppose consumers are 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 zero when the demand for a good is perfectly elastic . But demand is perfectly inelastic when consumer surplus is infinite.

Economic welfare is also called community surplus, or the total of consumer and producer surplus.

Example of Consumer Surplus

Consumer surplus is the benefit or good feeling of getting a good deal. For example, let's say that you bought an airline ticket for a flight to Disney World during school vacation week for $100, but you were expecting and willing to pay $300 for one ticket. The $200 represents your consumer surplus.

However, businesses know how to turn consumer surplus into producer surplus. In our example, let's say the airline realizes your surplus and as the calendar draws near to school vacation week raises its ticket prices to $600 each.

The airline knows there will be a spike in demand for travel to Disney World during school vacation week and that consumers will be willing to pay higher prices. So by raising the ticket prices, the airlines are taking potential consumer surplus and turning it into producer surplus, or additional profits.

Is a High Consumer Surplus Good?

A high consumer surplus means that goods are priced quite a bit lower in the market than where consumers would ultimately be willing to pay. This is often the result of a high degree of competition, technological progress, and producer efficiency. In general, all of these things are considered to be "good" for promoting economic growth and prosperity.

What Is Producer Surplus?

Similar to consumer surplus, producer surplus is the economic benefit to producers of goods measured by the difference in market price and where the producer would be willing to sell. A producer surplus thus exists if the market price of a good is higher than the price the producer is willing to sell.

What Is Total Economic Surplus?

Total economic surplus  is equal to the producer surplus plus the consumer surplus. It describes the total net benefit to society from free markets in goods or services.

In free markets, producers compete with one another to be the low-cost producer and grab market share from other companies in their space. The result is more quantity and lower prices for consumers, often lower than where they would be willing to pay for it. This difference between the market price (as determined by supply and demand) and the willingness to pay is the consumer surplus. A consumer surplus is seen as a benefit to the economy.

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Consumer Surplus Calculator

Table of contents

The consumer surplus calculator is a handy tool that helps you to compute the difference between what consumers are willing to pay for a good or service versus its market price. If you read on, you can learn what consumer surplus is , based on the consumer surplus definition . We will also show you how to find consumer surplus using the consumer surplus formula .

If you would like to learn some other microeconomics concepts, you may check our optimal price calculator or economic profit calculator .

As for now, however, let's focus on the definition and graph of the consumer surplus.

What is consumer surplus?

In economics, consumer surplus is defined as the difference between the price consumers actually pay and the maximum price they are willing to pay .

If you have ever attended an economics lecture, you have probably seen curves representing supply (S) and demand (D) as a function of price (P) versus quantity (Q).

If not, you can quickly grasp the concept in the consumer surplus graph below. The demand curve (D) is downward , as a lower price implies a higher demand for a given article. The supply curve (S), in contrast, is upward , since manufacturers produce more if they can sell their product at a higher price. The consumer surplus is the area between the equilibrium price (the level of price where the two curves cross each other) and the demand curve .

Now that you know what a consumer surplus is and how the consumer surplus graph looks like, let's find out how to calculate consumer surplus.

What is the the consumer surplus formula?

According to the consumer surplus definition, we need to determine the difference between how much the customer actually pays and the maximum price they are willing to pay. That is, the consumer surplus formula is the following:

consumer surplus = maximum price willing to pay - actual market price.

If you would like to estimate the consumer surplus for a whole economy, you need to use a slightly extended version of the formula, which you can reach in the related information of this consumer surplus calculator.

• E C S \rm ECS ECS stand for Extended Consumer Surplus;
• Q d Q_{\rm d} Q d ​ is the quantity demanded at equilibrium, where demand and supply are equal;
• P m a x P_{\rm max} P max ​ is the maximum price the buyer is willing to pay; and
• P d P_{\rm d} P d ​ is the price at equilibrium, where demand and supply are equal.

How to find the consumer surplus? Example

Let's look at an example to make sure that you've understood the concept behind the consumer surplus.

You have decided to buy a football, and you are willing to pay $100 for it. You check on the Internet for their prices there, and you find a shop where you can buy it for $80.

This means that you can save $20 on the purchase compared to what you were willing to spend. The $20 is your consumer surplus, which you can now add to your savings , invest, or spend on other goods and services.

How to use the consumer surplus calculator?

You get the value of the consumer surplus immediately after setting the actual price and the maximum price that the buyer is willing to pay ( willing price ). Alternatively, you can set the consumer surplus and give one of the other two parameters to receive the missing one.

In related information , you can set the equilibrium price and the equilibrium quantity (the values where the supply and demand are equal), and you can read the value for the extended consumer surplus .

How do I calculate the customer surplus?

In order to determine the customer surplus:

• Write down the actual price of an item.
• Write down how much the customers are willing to pay for this product.
• Compute the difference between the number from Step 1 and that from Step 2.
• The result is the customer surplus .

What is the customer surplus if the price is $20?

To know the customer surplus, you need to know how much people are willing to pay for this product . Assume it's $22. Then the customer surplus is $2 because we need to compute the difference between the actual price and what people are willing to pay: $22 - $20 = $2 .

Actual price

Willing price

The price the buyer is willing to pay.

Consumer surplus

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Equilibrium price

The price where the supply and demand are equal.

Equilibrium quantity

The quantity where the supply and demand are equal.

Extended consumer surplus

Consumer Surplus

The economic measure of a customer’s benefit

What is Consumer Surplus?

Consumer surplus, also known as buyer’s surplus, is the economic measure of a customer’s excess benefit. It is calculated by analyzing the difference between the consumer’s willingness to pay for a product and the actual price they pay, also known as the equilibrium price. A surplus occurs when the consumer’s willingness to pay for a product is greater than its market price.

Consumer surplus is based on the economic theory of marginal utility, which is the additional satisfaction a person derives by consuming one more unit of a product or service. The satisfaction varies by consumer, due to differences in personal preferences . According to the theory, the more of a product a consumer buys, the less willing he/she is to pay more for each additional unit due to the diminishing marginal utility derived from the product.

Calculating Consumer Surplus

The point where the demand and supply meet is the equilibrium price. The area above the supply level and below the equilibrium price is called product surplus (PS), and the area below the demand level and above the equilibrium price is the consumer surplus (CS).

While taking into consideration the demand and supply curves , the formula for consumer surplus is CS = ½ (base) (height) . In our example, CS = ½ (40) (70-50) = 400.

Consumer Surplus and the Price Elasticity of Demand

Consumer surplus for a product is zero when the demand for the product is perfectly elastic. This is because consumers are willing to match the price of the product. When demand is perfectly inelastic, consumer surplus is infinite because a change in the price of the product does not affect its demand. This includes products that are basic necessities such as milk, water, etc.

Demand curves are usually downward sloping because the demand for a product is usually affected by its price. With inelastic demand , consumer surplus is high because the demand is not affected by a change in the price, and consumers are willing to pay more for a product.

In such an instance, sellers will increase their prices to convert the consumer surplus to a producer surplus. Alternatively, with elastic demand, a small change in price will result in a large change in demand. It will result in a low consumer surplus as customers are no longer willing to buy as much of the product or service with a change in price.

Law of Diminishing Marginal Utility

According to economist Alfred Marshall , the more you consume a certain commodity, the lower the satisfaction derived from each additional unit of consumption. For example, if you buy one apple for $0.50, you are not willing to pay more for the second apple. At the same time, the utility derived from consuming the second apple is lower than it was for the first apple. The concept is described in the table below:

According to Alfred Marshal: Consumer Surplus = Total Utility – (Price x Quantity)

Assumptions of the Consumer Surplus Theory

1. utility is a measurable entity.

The consumer surplus theory suggests that the value of utility can be measured. Under Marshallian economics, utility can be expressed as a number. For example, the utility derived from an apple is 15 units.

2. No substitutes available

There are no available substitutes for any commodity under consideration.

3. Ceteris Paribus

It states that customers’ tastes, preferences, and income do not change.

4. Marginal utility of money remains constant

It states that the utility derived from the income of a consumer is constant. That is, any change in the amount of money a consumer has does not change the amount of utility they derive from it. It is required because without it, money cannot be used to measure utility.

5. Law of diminishing marginal utility

It states that the more a product or service is consumed, the lower the marginal utility is derived from consuming each extra unit.

6. Independent marginal utility

The marginal utility derived from the product being consumed is not affected by the marginal utility derived from consuming similar goods or services. For example, if you consumed orange juice, the utility derived from it is not affected by the utility derived from apple juice.

Consumer surplus is a good way to measure the value of a product or service and is an important tool used by governments in the Marshallian System of Welfare Economics to formulate tax policies. It can be used to compare the benefits of two commodities and is often used by monopolies when deciding the price to charge for its product.

Additional Resources

Thank you for reading CFI’s guide to Consumer Surplus. To keep learning and advancing your career, the following CFI resources will be helpful:

• Normal Goods
• Purchasing Power Parity
• Revenge Spending
• Supplier Power
• See all economics resources
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Consumer Surplus

Step-by-Step Guide to Understanding the Concept of Consumer Surplus in Economics

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What is Consumer Surplus?

A  Consumer Surplus is present when the actual prices paid by consumers for goods and services are less than the maximum prices at which they would be willing to pay.

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How Does a Consumer Surplus Work?

How to calculate consumer surplus, consumer surplus formula, graph of total economic surplus, consumer surplus calculator, consumer surplus calculation example.

In economics, a consumer surplus is measured to quantify the monetary benefits resulting from favorable (or unfavorable) market conditions.

Since pricing is a byproduct of the prevailing market competition within the economy, higher levels of competition lead to more benefits on the consumer side.

On the other hand, increased competition in the market tends to contribute to a more challenging environment to obtain higher profit margins.

Generally speaking, the prices of goods and services tend to decline once the product has become commoditized . In particular, the barriers to entry in a commoditized market are low and the level of competition is high, meaning that competition becomes oriented around prices, which tends to erode the profitability of market participants.

So if the price paid by consumers to complete the purchase of a product or service is less than the maximum price that they would be willing to pay for it (i.e. the “ceiling” as set by supply/demand), there is a consumer surplus in the market.

The difference between the actual price paid and the maximum price that consumers are willing to pay represents the marginal benefit received by the consumers.

Simply put, consumers can purchase goods and services for less than the maximum amount they would be willing to pay.

The concept of a consumer surplus is derived from the economic theory of marginal utility, which is defined as the additional benefit a consumer receives from one more unit of a good or service.

All else being equal, the greater the supply of a good or service (i.e. the number of sellers and available options) and the more accessible that it is, the more likely that consumers already have it.

For those not in possession of the good or service, the amount that consumers are willing to spend tends to decline given the environment that favors buyers over sellers.

The relationship between pricing and the consumer surplus is the following:

• Higher Pricing → Increased Consumer Surplus
• Lower Pricing → Decreased Consumer Surplus

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To reiterate from earlier, the consumer surplus quantifies the difference between the price that a consumer is willing to pay to purchase an item and the market price at which the transaction could be fulfilled.

The total economic surplus is the sum of the consumer and producer surplus, which refers to the benefit received by producers from the market price exceeding the prices that consumers are willing to pay.

The simplest formula for calculating the consumer surplus is as follows:

From there, the expanded variation of the formula is the following:

• Quantity → The total market demand for a given good or service at equilibrium.
• Maximum Price → The maximum price that consumers are willing to pay.
• Equilibrium Price → The price at equilibrium per the supply and demand graph.

The total economic surplus is comprised of consumer and producer surplus, so it measures the net utility received by consumers in a particular market.

At the core of the theory, the underlying question here is, “How much are consumers willing to pay at most in order to purchase the good?”

On the supply and demand curve, the area between the equilibrium price and the demand curve signifies the consumer surplus.

The equilibrium price is where the market price matches the consumer demand, so there is neither a shortage nor a surplus.

When illustrated visually on a supply and demand chart, the consumer surplus is the triangular area located below the demand curve, i.e. the section below the demand curve reflects the willingness of consumers in a market to pay for a good or service at different set prices.

Economic Surplus Graph (Source: UNL )

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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Suppose we’re calculating the consumer surplus for a hypothetical product.

We’ll use the following set of assumptions for our simplified exercise.

• Quantity at Equilibrium = 10 million
• Maximum Price = $20.00
• Equilibrium Price = $10.00

Therefore, the spread between the maximum price that consumers are willing to pay and the equilibrium price is $10.00.

Once our inputs are entered into our formula from earlier, the expanded variation, we arrive at a surplus of $50 million.

• Consumer Surplus = (1/2) × 10 million × ($20.00 – $10.00) = $50 million

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How To Calculate Consumer Surplus (With Examples)

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Understanding economic supply and demand provides valuable insight into any given market. You’ve probably seen a basic demand-supply graph used to illustrate the relationship between a product’s market price and the quantity demanded by consumers.

Consumer surplus and producer surplus are important pieces of the equation. Markets tend to fluctuate, especially because consumers are able or willing to spend at different price points for any given product or service. This is where a surplus is created.

Key Takeaways:

To calculate consumer surplus you need to know the difference between the cost consumers are willing to pay for a product or service and the actual market price.

To calculate extended consumer surplus you need to know the difference between the price the consumer is willing to pay and the price at equilibrium on the supply and demand curve, then multiply this by 0.5 the quantity at equilibrium where supply and demand are equal.

Producer surplus is the difference between the minimum price a producer is willing to accept for their goods or services and the final price they receive.

A social surplus is the sum of consumer surplus and producer surplus.

Price floors set a minimum on a price. Price ceilings set a maximum on a price. Both are tools enforced by governments when they feel their benefits outweigh their market inefficiencies.

What Is Consumer Surplus?

How to calculate consumer surplus, what is producer surplus, how to calculate producer surplus, price discrimination, what is social surplus, how do price floors and price ceilings affect the market, frequently asked questions, final thoughts.

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Based on the economic theory of marginal utility , consumer surplus is an economic measurement calculating the excess cost that consumers are willing to pay for a product or service in comparison to the actual market price.

For a better picture, let’s look at an example:

A shopper is browsing for a new television. Specifically, she wants a 42” OLED smart TV, and she’s set a maximum budget of $1,300. To her joy and surprise, she finds a television meeting all of her exact requirements for only $950. That $350 cost difference of what she paid versus what she was willing to spend is her consumer surplus, which she is now free to spend on other products, goods, or services. To put it in the simplest terms, consumer surplus is when you think you got a good deal because you paid less than you were expecting to.

When looking at a demand-supply graph, the demand curve is always going to be sloping downward due to the law of diminished marginal utility. We can measure consumer surplus with the following basic formula:

Consumer surplus = Maximum price willing to spend – Actual price

In our earlier example with the television, we can see that consumer surplus equals $1,300 minus $950 to give us a total of $350 for our surplus.

On a larger scale, we can use an extended consumer surplus formula:

Consumer surplus = (½) x Qd x ΔP

Qd = the quantity at equilibrium where supply and demand are equal

ΔP = Pmax – Pd

Pmax = the price a consumer is willing to pay

Pd = the price at equilibrium where supply and demand are equal

If this formula looks vaguely familiar, that’s because we’re actually solving for the area of the consumer surplus triangle on a demand-supply graph. As a reminder, the formula to calculate the area of a triangle is (½) x base x-height.

But then why does the consumer surplus formula require subtraction?

Good question. Keep in mind that the height of the triangle we’re solving for isn’t starting at 0 on the graph. Instead, it’s determined by the distance from the equilibrium price to the point where the demand curve intersects with the vertical axis. Because of this, our height is going to be the difference between those two points rather than the value of the topmost point on the axis.

Let’s take a look at an example using the extended formula.

A customer is willing to spend $8.00 on a new energy drink, but most customers are willing to pay only $5.00, which is the equilibrium point where supply meets demand. At a $5.00 retail value, the company supplies a store with 500 bottles to meet the demand. Plugging these values into our formula gives us (½) x 500 x ($8 – $5) for a total of $750 consumer surplus shared among the customers who made a purchase at the equilibrium price point. Those savings can go toward other products and services.

Supply and demand are all about balance, so the opposite side of the equation results in a producer surplus, which is the difference between the minimum price a producer is willing to accept for their goods or services and the final price they receive. A surplus happens when market prices exceed the lowest price point that a producer will accept.

Let’s look at an example to better understand producer surplus.

A car manufacturer decides to produce 10,000 of its newest sports model this year. Over the past few years, the standard selling price has been $90,000 for this type of vehicle, but this year, the economy is stronger than it’s been in the past, and many consumers are paying more, up to $150,000 in some cases since the supply is limited and the demand is higher than expected. If a car buyer spends $150,000 on a vehicle instead of the expected $90,000, the difference of $60,000 is the producer surplus. In simplest terms, producer surplus happens when a producer receives more revenue than expected for a good or service.

When looking at a demand-supply graph, the supply curve is always going to be sloping upward due to the law of increasing returns. We can calculate producer surplus with this formula:

Producer surplus = Total revenue – Total cost

Understandably, producers can’t earn a profit if they aren’t able to recoup at least the marginal cost they spent to produce and transport their products. A free market has this natural push-pull effect that prevents either the consumer or the producer from fully dictating price points.

However, some businesses are able to take advantage of price discrimination in order to increase company profits.

This selling strategy involves charging different prices for the same goods or services based on the business’s estimation of the maximum amount they think the customer is willing to pay.

For example, suppose you’re looking at renting a house on the beach for a week. In that case, the exact same house is going to cost a lot more if you’re renting during peak tourist season versus the off-season when the renter is desperately trying to prevent the house from sitting empty.

Most brand-name goods know that there’s power in a name and people are willing to pay much more to be “on brand” rather than buy a cheaper, almost identical alternative that’s lacking a famous logo.

Airlines are also notorious for price discrimination. They know that people are willing to pay more for convenience.

Because there’s less of a demand for early morning and late-night flights, the airline is able to price fares differently depending on the time of day, even though the cost of flying and fueling a plane from Destination A to Destination B isn’t going to change. This is called the elasticity of demand.

Also referred to as economic surplus or total surplus, a social surplus is the sum of consumer surplus and producer surplus. When looking at a demand-supply graph, the social surplus is the total area between the supply curve, the demand curve, and the point of equilibrium.

A deadweight loss, which occurs when the economy is producing at an inefficient quantity, is the loss in total surplus.

When the market is operating at optimal efficiency, it’s impossible to increase consumer surplus without reducing producer surplus, and it’s also impossible to improve producer surplus without lowering consumer surplus.

Total surplus is larger at equilibrium quantity and price than it would be at any other quantity and price.

A healthy market is able to adapt and settle naturally on an equilibrium point that balances price and quantity. Imposing a price floor or ceiling prevents the market from adjusting to its ideal point of equilibrium and maximum efficiency while also transferring some of the consumer surplus to producers and vice-versa.

A price ceiling is a maximum price a producer is allowed to charge consumers in exchange for a good or service .

The government’s impact on the drug market is an excellent example of price ceilings. Let’s say that a pharmaceutical company created a new life-saving drug. The market-price equilibrium, if left to the free market without any restrictions, would be $800, with an expected 50,000 people using the drug per month.

But the government wants to make the drug more affordable, so it imposes a price ceiling at $500.

So, what happens?

First, the pharmaceutical company is going to produce a lower amount of product. Their supply is going to reflect the price ceiling line on the graph instead of the market equilibrium point. This reduces the social surplus and increases deadweight loss. Basically, money is being discarded without benefitting anyone.

In addition, some of the producer surpluses end up being transferred to consumers, which is why consumers largely favor price ceilings. However, the gain to consumers is less than the loss to producers, aka still a deadweight loss. The market is not operating as efficiently as it could be.

A price floor is the lowest price that can legally be paid for goods or services.

For example, let’s say the city government is concerned about a historical theater going out of business. It has a long tradition of providing entertainment to the community giving local musicians and actors a place to perform. The government decides to set a minimum ticket price at $10 for performances.

As a result of the higher price per ticket, demand for tickets falls. The theater had been selling 1,500 tickets for $7 at the equilibrium point, but now they’re selling 1,100 for $10. Although the price floor caused some of the consumer surplus to be transferred to the producer, which is why producers often favor price floors, the market is still looking at an overall deadweight loss.

Is there any benefit in understanding consumer surplus?

Yes, there is a great benefit to understanding consumer surplus. If you are a consumer, knowing about consumer surplus empowers you to make smart long term definitions. For example, if you buy a product at a price less than you’re willing to spend, you know you have a consumer surplus. This concept can guide you to a decision to either spend or save that “surplus” based on your needs and wants.

Who is affected by consumer surplus?

Consumers and producers are affected by consumer surplus. A consumer is obviously affected by a consumer surplus because it provides a concept on how to approach paying for goods or services. Similarly, a producer needs to consider the difference in which they are willing to set a price against what is the greatest amount of goods or services they can sell. This in part is based on the where the consumer surplus ends at equilibrium.

The market is fluid. When it’s allowed to operate freely, consumers and producers tend to push and pull until equilibrium is reached and the market is able to regulate its supply and demand with maximum efficiency .

Understanding the basics of supply and demand; consumer, producer, and social surplus; price discrimination; deadweight loss; price ceilings; and price floors are critical to making comprehensive business decisions about quantity and pricing.

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Chris Kolmar is a co-founder of Zippia and the editor-in-chief of the Zippia career advice blog. He has hired over 50 people in his career, been hired five times, and wants to help you land your next job. His research has been featured on the New York Times, Thrillist, VOX, The Atlantic, and a host of local news. More recently, he's been quoted on USA Today, BusinessInsider, and CNBC.

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Example Solved Problems with Answer, Solution, Formula - Integration: Consumer’s surplus | 12th Business Maths and Statistics : Chapter 3 : Integral Calculus - II

Chapter: 12th business maths and statistics : chapter 3 : integral calculus - ii, integration: consumer’s surplus.

Consumer’s surplus:

This theory was developed by the great economist Marshal. The demand function reveals the relationship between the quantities that the people would buy at a given price. It can be expressed as p = f ( x )

Let us assume that the demand of the product x = x 0  when the price is p 0 . But there can be some consumer who is ready to pay q 0 which is more than p for the same quantity x 0 . Any consumer who is ready to pay the price more than p 0 gains from the fact that the price is only p 0 . This gain is called the consumer’s surplus.

It is represented in the following diagram

Mathematically the Consumer’s Surplus (CS) can be defined as

CS = (Area under the demand curve from x = 0 to x = x 0 ) – (Area of the rectangle OAPB)

Example 3.27

The demand function of a commodity is y = 36 − x 2 . Find the consumer’s surplus for y 0 = 11

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Unit 4: Consumer and producer surplus, market interventions, and international trade

About this unit.

How can we balance supply, demand, and prices so that neither buyers nor sellers feel taken advantage of? Learn how regulations support these kinds of markets that maximize efficiency and wellbeing.

Consumer and producer surplus

• Demand curve as marginal benefit curve (Opens a modal)
• Consumer surplus introduction (Opens a modal)
• Total consumer surplus as area (Opens a modal)
• Producer surplus (Opens a modal)
• Equilibrium, allocative efficiency and total surplus (Opens a modal)
• Lesson Overview: Consumer and Producer Surplus (Opens a modal)
• Consumer and Producer Surplus and Allocative Efficiency 4 questions Practice

Market interventions and deadweight loss

• Rent control and deadweight loss (Opens a modal)
• Minimum wage and price floors (Opens a modal)
• How price controls reallocate surplus (Opens a modal)
• Price ceilings and price floors (Opens a modal)
• Taxation and dead weight loss (Opens a modal)
• Example breaking down tax incidence (Opens a modal)
• Percentage tax on hamburgers (Opens a modal)
• Taxes and perfectly inelastic demand (Opens a modal)
• Taxes and perfectly elastic demand (Opens a modal)
• Economic efficiency (Opens a modal)
• Lesson Overview: Taxation and Deadweight Loss (Opens a modal)
• Price and quantity controls 4 questions Practice
• The effect of government interventions on surplus 4 questions Practice
• Tax Incidence and Deadweight Loss 4 questions Practice

International trade

• Changing equilibria from trade (Opens a modal)
• Trade and tariffs (Opens a modal)
• Sample free response question (FRQ) on tariffs and trade (Opens a modal)
• International trade and public policy 4 questions Practice

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What area represents producer surplus in the graph shown here if this market is in equilibrium?

Consumer surplus is the buyer's willingness to pay minus the seller's cost.

Consumer surplus decreases when the price in that market increases.

Consumer surplus is the area

below the demand curve and above the price.

above the supply curve and below the price.

above the demand curve and below the price.

A buyer's willingness to pay is that buyer's

minimum amount they are willing to pay for a good.

producer surplus.

consumer surplus.

maximum amount they are willing to pay for a good.

Producer Surplus is the area

Below the price and above the supply curve

Under the supply curve

Between the supply and demand curves

Under the demand curve, and above the price

Other things being equal, if the price of a good falls, the consumer surplus

May increase, decrease, or remain unchanged

Is unchanged

If a buyer's willingness to pay for a new Honda is €20,000 and she is able to actually buy it for €18,000, her consumer surplus is

When the price is P 1, consumer surplus is

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• point\:of\:diminishing\:return\:11000-x^{3}+36x^{2}+700x
• point\:of\:diminishing\:return\:-x^{3}+42x^{2}+1100,\:0\le x\le19
• point\:of\:diminishing\:return\:r(x)=-x^3+48x^2+1000
• point\:of\:diminishing\:return\:-\frac{3}{7}(x^3-7x-7)

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