Formula of Consumer Surplus (Table of Contents)
- What is Consumer Surplus Formula?
- Examples of Consumer Surplus Formula
- Consumer Surplus Formula Calculator
What is Consumer Surplus Formula?
The formula for consumer surplus is an economic formula which is used to calculate the consumer benefit by deducting the actual price that the consumer has paid from the maximum price the consumer is willing to pay (for a single unit of product). Mathematically, consumer surplus equation is represented as,
Now, the consumer surplus formula is extended for the market as a whole i.e. multiple consumers. The area of ΔRPS in the illustrated graph shown below represents the consumer surplus which is bounded by the downward sloping demand curve, the axis for the price and the horizontal line drawn parallel to abscissa for demand at equilibrium.
Consumer surplus equation is mathematically represented as,
In the above graph, point R and P represents the maximum price willing to pay and market price respectively on the ordinate. On the other hand, point T or S corresponds to the quantity demanded at equilibrium. Consequently, the consumer surplus equation can be expressed as,
(Since OT || PS)
Explanation of the Consumer Surplus Formula
The first formula of consumer surplus for one unit of product can be computed in the following three simple steps:
Step 1: Firstly, assess the utility of the product for the consumer based on which the highest price that the consumer is willing to pay can be arrived at.
Step 2: Now, figure out the actual price of the product in the market.
Step 3: Finally, the consumer surplus is arrived at by deducting the value derived in Step 2 from the value in Step 1 as shown below.
Explanation of the Consumer Surplus Extended Formula
On the other hand, the following four steps help in the computation of the extended formula for consumer surplus which is more popularly used:
Step 1: Firstly, draw the Supply and Demand curves with quantity on the abscissa and price on the ordinate.
Step 2: Now, locate the market price which is the equilibrium price. According to the law of supply and demand, the market price is the point of intersection between the supply and the demand curve.
Step 3: Now, draw a horizontal line between the market equilibrium price and the ordinate.
Step 4: Finally, calculate the area of the upper triangle (ΔRPS in the above diagram). Consequently, calculation of consumer surplus can be done by multiplying the base (RP) and the height (PS) and then dividing by 2.
Examples of Consumer Surplus Formula
Let us see some simple to advanced examples of Consumer Surplus equation.
Consumer Surplus Formula – Example #1
Let us take the example of a single customer and a single product. So, let us assume that a customer decides to buy a mobile with a 16GB RAM and a 5.5″ screen and is willing to pay up to $1,200 for that. Now, while browsing through various electronics stores, the customer discovers a store which offers all the criteria exactly at $900.
- Maximum price willing to pay = $1,200
- Actual price = $900
- Consequently, using the first formula we get, Consumer Surplus Formula= $1,200 – $900
- Consumer Surplus = $300
Therefore, the customer saved $300 as consumer surplus which he/she can spend on some other goods or services.
Consumer Surplus Formula – Example #2
Let us take another example wherein a customer is willing to pay $20 for the packed food item and this is the highest price among the customers. In fact, the majority of the customers are willing to pay only $10, which is eventually the market price (demand and supply curves meet). Now at $10, the total food packets demanded is 30 (equilibrium demand).
- Demand quantity at equilibrium = 30 units
- Maximum price willing to pay – Market price = $20 – $10 = $10
- Consequently, using the extended formula we get,
- Consumer Surplus Formula= ½ * 30 * $10
- Consumer Surplus = $150
Consumer Surplus Formula Calculator
You can use the following Consumer Surplus Formula Calculator.
|Consumer Surplus Formula =||Maximum Price Willing to Pay – Actual Price|
|0 – 0 =||0|
Relevance and Use of Consumer Surplus Formula
- It is very important to have a clear understanding of the concept as it can help in taking business decisions associated with price-output setting, value pricing and price discrimination under the purview of various marketing strategies.
- It has to be accepted that there is a trade-off between consumer surplus and revenue generated. If the emphasis is laid on increasing revenue through an increase in the product price, then the consumer surplus will deteriorate as a result.
- The aforementioned scenario may result in higher income but accompanied by a relative weakening of the firm’s position among competitors with identical products. As such, one has to be very cautious while fixing the price in order to ensure that the consumer surplus is not impacted severely.
Consumer Surplus Formula in Excel (with excel template)
Now, let us take an example of consumer surplus with the demand function represented as QD = -0.08x + 80 and the supply function represented as QS=0.08x where x is the quantity demanded in kg.
In below-given template is the data used for the calculation of consumer surplus equation.
From the above data, we have collected the data required for the calculation of consumer surplus.
In the below given excel template, we have used the calculation of Consumer Surplus Formula to find the consumer surplus.
So the calculation of Consumer Surplus will be-
You can download this Consumer Surplus Formula in Excel template here – Consumer Surplus Formula Excel Template
This has been a guide to Consumer Surplus Formula. Here we discuss its uses along with simple to advanced examples to understand the Consumer Surplus Equation. Here we also provide you with Consumer Surplus Formula Calculator with downloadable excel template. You can learn more about Excel Modeling from the following articles –