Consumer Surplus

Introduction

• Consumer surplus: Excess value a buyer receives from a purchase.
• Reflects the difference between willingness to pay and the actual price paid.

Key Concepts

Demand Curve

• Represents the willingness to pay of buyers.
• Indicates how much a consumer values a product based on factors like income and preferences.
• Shows the quantity demanded at each price level.

Willingness to Pay

• Unique to each buyer.
• Highest price a buyer is willing to pay for a product (reservation price).
• Consumer surplus occurs when the willingness to pay is greater than the price paid.

Measuring Consumer Surplus

Formula

• Consumer Surplus = Willingness to Pay - Price Paid
  • Example: If willing to pay $50 for jeans but only pay $40, consumer surplus = $10.
  • Represents the extra value or 'happiness' retained by the consumer.

Graphical Representation

• Demand Curve: Reflects willingness to pay.

• Equilibrium Price: Actual price paid, where demand meets supply.

• Consumer surplus is the area under the demand curve and above the price up to the quantity purchased.

• Marginal Buyer: The consumer whose willingness to pay equals the price; point where they would stop purchasing.

Example

• If price is lower than willingness to pay, consumer enjoys surplus.
• Graphically, measure by the area of the triangle under the demand curve above the equilibrium price.
  • Use formula for the area of a triangle: 1/2 * base * height.

Summary

• Consumer surplus is a critical concept to understanding buyer behavior and market dynamics.
• Graphical methods and formulas help quantify the surplus for economic analysis.