Consumer Surplus Definition: Examples of Consumer Surplus

Consumer surplus, also known as consumer’s surplus or social surplus, is the difference between the actual price a consumer paid for a product and the maximum price they were willing to pay. Put simply, consumer surplus is the benefit consumers feel when buying something at a lower price than expected.

The microeconomics concept of consumer surplus relies on the assumption that utility (consumer satisfaction) is measurable, and that marginal utility (the additional satisfaction derived from purchasing additional units of a product) decreases with quantity of units purchased. Under the law of diminishing marginal utility, the total utility of a good exceeds the total market value, since consumers would be willing to pay the market price even at the lowest utility; any extra utility is considered consumer surplus.

Consumer surplus is one half of the concept of economic surplus first put forward by French engineer and economist Jules Dupuit in 1844 and later popularized by Alfred Marshall, giving it the name, Marshallian surplus. Economic surplus, or total surplus, is the combination of consumer surplus and producer surplus (the amount producers benefit by selling goods at a higher price).

The concept of consumer surplus was originally used in welfare economics, to measure the benefit of public goods such as roads and bridges. In the twentieth century, consumer surplus fell out of favor as economists questioned the measurability of utility.

The basic formula to find consumer surplus is CS = ½ (base) (height), with the equilibrium quantity being the base, and price difference between the high price and the equilibrium price being the height. Economists in a competitive market track this information in a graph called the demand curve. Here’s how to plot this information:

1. 1. Market price: On the y-axis (vertical axis) of the graph, plot the rising market price of the product.
2. 2. Market quantity: On the x-axis (horizontal axis) of the graph, plot the amount of goods available in the marketplace.
3. 3. Demand curve: Track the demand by plotting at the price at which goods were sold in conjunction with the amount of product available. This line that slopes downward from left to right is the demand curve. This follows the law of diminishing marginal utility, which states that as consumption increases, the marginal utility declines.
4. 4. Supply curve: Determine the supply curve by plotting the price-to-quantity relationship from the point of view of the seller or producer. This line ascends from left to right.
5. 5. Market equilibrium: The equilibrium price shows where the price matches the demand. The equilibrium quantity is a horizontal line showing where there is neither a shortage or surplus of goods. Where these two factors meet tells you where there is a balance between the price and the demand. On the graph, it appears where the supply curve and the demand curve cross, and is referred to as the equilibrium point.
6. 6. Consumer surplus: Purchases made above the equilibrium price, but below the demand curve, form a triangle whose area is consumer surplus. The consumer surplus formula, therefore, is based on the area of a triangle: CS = ½ (base) (height).
7. 7. Deadweight loss: When the socially optimal amount of a good is not produced, this is considered a deadweight loss. This region will be visible on the graph if the actual quantity produced is less than the equilibrium quantity. It will reduce the size of both consumer surplus and producer surplus.

Here’s how consumer surplus plays out in real life.

1. 1. Airline tickets: Airline ticket prices change rapidly, with countless sites dedicated to guaranteeing consumers the lowest price. If you’re willing to pay $500 for a flight from New York to Los Angeles, but end up paying $300, you receive $200 in consumer surplus. Sellers, however, know that you are willing to pay more for a flight, and will increase ticket prices before important dates like Thanksgiving or summer vacation, thereby turning consumer surplus into producer surplus.
2. 2. Gasoline: People often drive further to guarantee a lower price per gallon to refill their car’s gas tank, but they would be willing to pay more to avoid running out of gas. The money you save by driving to a gas station with lower prices is consumer surplus. For example, if gas costs $5/gallon in an urban area and $4/gallon out of town, your consumer surplus is $1/gallon. Goods like gasoline also can have a ceiling price, which caps how much companies can charge for goods. Price ceilings typically apply to normal goods like gas, food, or medicine. A price ceiling can cause deadweight loss, reducing consumer and producer surplus.
3. 3. Cell phones: A cell phone provides immense utility to consumers: communication with the outside world. Therefore, consumers are often willing to pay more than the market price to secure a cell phone—even if the market price is high. According to the law of diminishing marginal utility, however, consumer satisfaction will decrease with each subsequent purchase of a replacement phone.

Get the MasterClass Annual Membership for exclusive access to video lessons taught by the world’s best, including Paul Krugman, Doris Kearns Goodwin, Ron Finley, Jane Goodall, and more.