Imagine this, you decided to refit your shower. You estimated the cost of refitting to be around $2,000, this is what you are willing to pay.
So you contacted a few companies and they quoted you with $1,500.
At the end you chose a company that quoted $1,500 and you were pretty happy with yourself as you effectively saved $500 that you thought you would spend.
This is called consumer surplus, and our consumer surplus calculator is a useful tool that quickly computes this measurement for you.
Consumer Surplus Defintion
Consumer surplus is the economic benefit you receive when you pay less for a product than the maximum price you’re willing to pay.
Consumer surplus is a key concept in microeconomics that measures the difference between what consumers are willing to pay for a product or service – based on their perceived utility – and the actual price they pay. This difference represents the extra value or satisfaction consumers gain, which isn’t captured by the transaction’s price.
In a graph demonstrating this concept, the demand and supply curves intersect at the equilibrium price and quantity. The equilibrium price and quantity means that price matches the expencations of the market.
The area above the price at equilibrium and below the demand curve up to the quantity sold shows the extended consumer surplus.
Consumer Surplus Formula
To calculate consumer surplus, you can use the consumer surplus formula, which is:
Consumer Surplus = Maximum Price Willing to Pay - Actual Price- Maximum Price Willing to Pay: The highest price you’re willing to pay for a product, reflecting the value you place on it.
- Actual Price: The market price or the price you pay for the product.
Consumer Surplus Example Calculation
Imagine the market competition has set the price for a designer bag you want at $300. However, you’ve come prepared to spend up to $450 because that’s the value you place on it. The difference of $150 is your consumer surplus.
Let’s break down a simple consumer surplus calculation:
- Your maximum willingness to pay (WTP): $450
- The market price (P): $300
- Equilibrium quantity (Q): 1 bag
In this case,
CS = $450 - $300 CS = $150Your consumer surplus is $150. This demonstrates how markets often result in consumers paying less than their maximum willingness to pay; thus, they ‘save’ money.