The consumer surplus is a simple concept. Think of something that you would really like to buy right now. For me it would be a can of Fanta. I would be willing to pay up to £1 for a can of Fanta but when I get to the shop Fanta only costs £0.79. I have a surplus of £0.21. Some of you reading this would be prepared to pay more than £1 for a can of Fanta and your consumer surplus would be higher. Many of you may be willing to pay less than £1 and your consumer surplus would be smaller.
The consumer surplus can never be negative, when consumers act rationally they would never pay more than their maximum price. For instance if the price of Fanta had been £1.10 when I got to the shop I wouldn’t have bought Fanta, I would have gone without or purchased an alternative. A supply and demand diagram can be used to show the consumer surplus as a total in each market. |
PeD & The Consumer Surplus
The consumer surplus diagram above shows a unitary elastic demand curve (PED=1) The diagrams below can be used to show that when PED is more inelastic the consumer surplus is larger and when PED is more elastic the consumer surplus is smaller.
The consumer surplus shows economists the extra value that consumers are experiencing from making transactions across different markets. This is known as economic utility or economic satisfaction. Consumers making transactions in markets with a higher consumer surplus are enjoying more economic satisfaction, utility, from their limited disposable income.
Consumer Surplus and Marginal Utility
Marginal Utility (marginal = next unit) (utility = benefit or satisfaction)
In my example above, would I continue to receive the same £0.21 worth of surplus if I were to buy a second, third or twentieth can of Fanta? Of course not!
After I finish the first can of Fanta I may still be thirsty so there may be some surplus but if I were to buy 10 cans then it is hopefully clear that I am no longer gaining any satisfaction from each additional unit. I couldn’t drink 10 cans of Fanta and now I have to carry them round with me which is causing me issues, definitely not giving me any extra satisfaction. This same diminishing marginal utility explains why the demand curve is downward sloping and also explains the wedge or trainable shape of the consumer surplus in each of the diagrams above.
Consumer Surplus and Marginal Utility
Marginal Utility (marginal = next unit) (utility = benefit or satisfaction)
In my example above, would I continue to receive the same £0.21 worth of surplus if I were to buy a second, third or twentieth can of Fanta? Of course not!
After I finish the first can of Fanta I may still be thirsty so there may be some surplus but if I were to buy 10 cans then it is hopefully clear that I am no longer gaining any satisfaction from each additional unit. I couldn’t drink 10 cans of Fanta and now I have to carry them round with me which is causing me issues, definitely not giving me any extra satisfaction. This same diminishing marginal utility explains why the demand curve is downward sloping and also explains the wedge or trainable shape of the consumer surplus in each of the diagrams above.