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February 25, 2018 

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VARIABLE: A quantity, usually represented as a symbol, that can take on one of a set of values. Variables play a key role in the scientific method and economic analysis. A major task undertaken by the study of economics is to identify the specific value of variables such as price, quantity, unemployment, production, wages, income, among a host of others. This often accomplished using assorted models, such as the market model.

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CONSUMER SURPLUS:

The satisfaction that consumers obtain from a good over and above the price paid. This is the difference between the maximum demand price that buyers are willing to pay and the price that they actually pay. A related notion from the supply side of the market is producer surplus.
Consumers' surplus is the extra satisfaction received when purchasing a good. The demand price is generally greater than the price actually paid. Most consumers under most circumstances receive some surplus of satisfaction. Even competitive markets overflowing with efficiency generate an ample amount of consumer surplus.

Suppose, for example, that Duncan Thurly is willing and able to pay $3 for a Hot Momma Fudge Bananarama Ice Cream Sundae. This is his demand price. However, the going market price, the actual price that everyone pays for a Hot Momma Fudge Bananarama Ice Cream Sundae at the Hot Momma Fudge Bananarama Ice Cream Shoppe is $2. While Duncan is willing and able to pay $3, he pays only $2. He receives a $1 consumer surplus on this purchase.

A Visual Representation

The demand curve for Yellow Tarantulas, a cute and cuddly creature from the Wacky Willy Stuffed Amigos line of collectibles, presented in this exhibit can be used to illustrate consumer surplus.

Consumers' Surplus



The demand price of Yellow Tarantulas is measured on the vertical axis and the quantity demanded is measured on the horizontal axis. The negatively-sloped demand curve captures the law of demand relation between these two variables. Key to this discussion, the demand price represents the maximum price that buyers are willing and able to pay. However, they often end up paying less.

For example, if the quantity demanded is 20 Yellow Tarantulas, then the demand price is $40. However, if the quantity demanded is 80 Yellow Tarantulas, then the demand price is $10.

Now suppose that the going market price of Yellow Tarantulas is $30. If so, buyers are willing and able to purchase 40 Yellow Tarantulas. Click the [Going Price] button to highlight this situation. However, while the demand price for the 40th Yellow Tarantula is $30, the demand prices for the other 30 Yellow Tarantulas are greater than $30. For example, the buyer who purchased the 20th Yellow Tarantula is willing and able to pay $40.

Yet, because the market price is only $30, the 20th Yellow Tarantula is purchased for $10 less than the maximum demand price. The difference between the demand price and the price paid is consumer surplus. This particular buyer gains $10 worth of consumer surplus. In fact, every Yellow Tarantula sold up to the 40th generates consumer surplus for the buyer. The 40th Yellow Tarantula is the only one with a match between demand price and price paid and no consumer surplus.

The total consumer surplus associated with a $30 price can be revealed by clicking the [Consumers' Surplus] button in the exhibit. The yellow triangle beneath the demand curve, but above the $30 price, is the consumer surplus.

The size of this consumer surplus triangle--while probably evident, but worth stating and demonstrating explicitly--depends on the price of the good. A higher price results in a smaller consumers's surplus and a lower price generates a larger consumer surplus. A click of the [Higher] and [Lower] buttons will reveal these alternatives.

Producers' Surplus

A comparable surplus from the supply side of the market is producer surplus. It too exists in efficient, competitive markets. As a matter of fact, an efficient market is one that generates the maximum total amount of consumers' and producer surpluses. A market that falls short of the maximum is NOT efficient.

<= CONSUMER SOVEREIGNTYCONSUMPTION =>


Recommended Citation:

CONSUMER SURPLUS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: February 25, 2018].


Check Out These Related Terms...

     | law of demand | demand schedule | demand curve | demand space | demand determinants | change in demand | change in quantity demanded | income effect | substitution effect | producer surplus |


Or For A Little Background...

     | demand | demand price | quantity demanded | efficiency | competitive market | market | quantity | price | unlimited wants and needs | economic analysis | scarcity | good | service | satisfaction |


And For Further Study...

     | market demand | competition | consumer sovereignty | exchange | third estate | utility | consumer demand theory | utility analysis |


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