Consumer Surplus is used to measure the welfare of a group of consumers
who purchase a particular product at a particular price. Consumer
surplus is defined as the difference between what consumers are willing
to pay for a unit of the good and the amount consumers actually do pay for
the product. Willingness to pay can be read off of a market demand
curve for a product. The market demand curve shows the quantity of the good
that would be demanded by all consumers at each and every price that might
prevail. Read the other way, the demand curve tells us the maximum price
that consumers would be willing to pay for any quantity supplied to the
A graphical representation of consumer surplus can be
derived by considering the following exercise.
Suppose that only one unit of a good is available in a
market. As shown in the adjoining Figure, that first
unit could be sold at the price P1. In other words there
is a consumer in the market who would be willing to
pay P1,. Presumably that person either has a relatively
high desire or need for the product or the person has a
relatively high income. To sell two units of the good the price would have to be lowered to P2.
(This assumes that the firm cannot perfectly price discriminate and charge two separate prices to
two customers.) A slightly lower price might induce another customer to purchase the product,
or, might induce the first customer to buy two units. Three units of the good could be sold if the
price is lowered to P3, etc.
The price that ultimately prevails in a free market is that price which equalizes market supply with
market demand. That price will be P in the diagram as long as the firms do not price discriminate.
Now go back to the first unit that could have been sold. The person who would have been willing
to pay P1 for a unit of the good ultimately pays only P for the unit. The difference between the
two prices represents the amount of consumer surplus that accrues to that person. For the second
unit of the good, someone would have been willing to pay P2 but ultimately pays P. The second
unit generates a smaller amount of surplus than the first unit.
We can continue this procedure until the market supply at the price P is reached. The total
consumer surplus in the market is given by the sum of the areas of the rectangles. If many units of
the product are sold then a one-unit width would be much smaller than shown in the diagram.
Thus total consumer surplus can reasonably be measured as the area between the demand curve
and the horizontal line drawn at the equilibrium market price. This is shown as the red triangle in
the diagram. The area representing consumer surplus is measured in dollars.
Changes in Consumer Surplus
the supply of a good rises, represented as a rightward shift in the supply
curve from S to S' in the adjoining diagram. At the original price P1,
consumer surplus is given by the blue area in the diagram. (That's the
triangular area between the P1
price line and the demand curve) The increase in supply lowers the market
price to P2. The
new level of consumer surplus is now given by the sum of the blue and
yellow areas in the Figure. (That's the triangular area between the P2
price line and the demand curve) The change in consumer surplus, CS, is
given by the yellow area in the Figure. (That's the area denoted by a
and b) Note that the change in consumer surplus is determined
as the area between the price that prevails before, the price that prevails
after, and the demand curve. In this case consumer surplus rises
because the price falls. Two groups of consumers are affected. Consumers
who would have purchased the product even at the higher price P1,
now receive more surplus (P1
- P2) for each
unit they purchase. These extra benefits are represented by the rectangular
area a in the diagram. Also, there are additional consumers who were unwilling
to purchase the product at price P1,
but are now willing to purchase at the price P2.
Their consumer surplus is given by the triangular area b in the diagram.
International Trade Theory and Policy - Chapter 90-6A: Last
Updated on 8/19/04