Consumer Surplus

Consumer Surplus Definition

Consumer Surplus is the difference between the actual price that the customers pay for a product & the maximum price that they are ready to pay (for a single unit). You can calculate Consumer Surplus by using the formula as = Maximum Price to be paid willingly – Actual Paid Price

Consumer Surplus Formula

There are two ways to calculate Consumer Surplus

#1 – Basic Formula

Consumer Surplus Formula = Maximum Price Willing To Pay – Actual Price

  1. Find the maximum price that the consumer is willing to pay.
  2. The price they actually pay for a product.
  3. Difference between (1) and (2).

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Consumer Surplus (wallstreetmojo.com)

#2 – Using Consumer Surplus Graph

Another way to calculate consumer surplus is through demand and supply graph. Let’s understand this with the help of the diagram below.

Consumer Surplus Graph

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Consumer Surplus (wallstreetmojo.com)

The above consumer surplus graph represents the demand curve (red line) and the supply curve (green line) with “quantity” across the x-axis and “price” along the y-axis. The demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more is a downward-sloping curve, which means that as the price of the product increases, its demand falls (other factors remaining constant). On the other hand, the supply curveSupply CurveSupply curve represents the relationship between quantity and price of a product which the supplier is willing to supply at a given point of time. It is an upward sloping curve where the price of the product is represented along the y-axis and quantity on the x-axis.read more is an upward sloping curve which means as the price of a product increases, it supplies also increases (other factors remaining constant).

As per the law of demandLaw Of DemandThe Law of Demand is an economic concept that states that the prices of goods or services and the quantity demanded are inversely related when all other factors remain constant. In other words, when the price of a product rises, its demand falls, and when its price falls, its demand rises in the market.read more and supply, the intersection (point S) where both the curves meet is known as equilibrium or market price. The market price is the price the consumer is willing to pay for a given quantity of goods or services.

As per the graph, area of ∆RPS = 1/2 * base * height

which is = 1/2 * PS *RP or 1/2 * OQ * RP

How to Calculate Consumer Surplus?

You can calculate consumer surplus using these three simple steps:

  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.

  2. Now, figure out the actual price of the product in the market.

  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.


    consumer surplus formula1

The following four steps help in the calculation of the consumer surplus using graph (which is more popularly used):

consumer surplus formula4

Consumer Surplus Examples

You can download this Consumer Surplus Formula Excel Template here – Consumer Surplus Formula Excel Template

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 that offers all the criteria exactly at $900.

Given,

  • Maximum price willing to pay = $1,200
  • Actual price = $900
  • Consequently, using the first formula we get, Consumer Surplus = $1,200 – $900
  • = $300

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 curveSupply CurveSupply curve represents the relationship between quantity and price of a product which the supplier is willing to supply at a given point of time. It is an upward sloping curve where the price of the product is represented along the y-axis and quantity on the x-axis.read more meet). Now at $10, the total food packets demanded is 30 (equilibrium demand).

Given,

  • 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 = ½ * 30 * $10 = $150

Example #3

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 the below-given template is the data used for the calculation.

example

From the above data, we have collected the data required for the calculation.

consumer surplus formula exce1.2

In the below given excel template

example

So the calculation of Consumer Surplus will be-

example

Relevance and Uses

Recommended Articles:

This has been a guide to what is Consumer Surplus and its definition. Here we discuss the formula to calculate it along with examples. You can learn more about Excel Modeling from the following articles –

Reader Interactions

Comments

  1. DEREUNA HILTON says

    I have learnt and known the definition of consumer surplus

Leave a Reply

Your email address will not be published. Required fields are marked *