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Consumer surplus

Consumer surplus – What is a consumer surplus?

Consumer surplus is the difference between the maximum amount a consumer is able or willing to pay for a product and the amount they actually pay.

Consumer surpluses are affected by the laws of supply and demand. Find out more about how supply and demand, and learn how it can affect your business.

Consumer surpluses occur when consumers are willing to pay over the market value for a particular good or service, and this can happen for a number of different reasons.

For example, if there are no obvious alternatives or substitutes for a particular product, consumers are more likely to pay more than the market rate.

Consumer surplus and economic benefit

Consumer surplus is considered to be a measure of economic benefit. When a consumer surplus occurs, the consumer still receives the same benefit (the product) but at a lower cost than they are prepared to pay. The greater the consumer surplus, the greater the economic benefit.

On a personal level, a consumer surplus is associated with the feeling of getting a good deal.

How to calculate consumer surplus

Because a consumer surplus is simply the difference between the amount a consumer is willing to pay and the amount they actually end up paying, it’s fairly straightforward to calculate consumer surplus.

To calculate consumer surplus, all you need to do is follow the consumer surplus formula:

Maximum price willing to pay – actual price paid = consumer surplus

Consumer surplus and price elasticity of demand

Consumer surpluses are affected by price elasticity of demand (which refers to the relationship between the price of and demand for a product).

If the price of a commodity easily affects demand, that product is considered to be elastic. If a product is perfectly elastic, the market rate of a product will exactly match what consumers are willing to pay. As such, the more elastic a product is, the lower the consumer surplus will be.

On the other hand, if demand is not easily affected by price, it’s considered to be inelastic. If a product is entirely inelastic, there is no limit on how great consumer surplus can be, as the level of demand will remain the same regardless of the price.

In other words, inelasticity occurs when people will continue buying the product regardless of price, and if individuals are always prepared to pay over the market rate, there will always be a consumer surplus.

Consumer surplus example

There are many real-world consumer surplus examples. For example, you are planning to go on holiday and are expecting to pay £500 for flights. When you book the flights, you actually only end up paying £400.

Using the consumer surplus formula, you can calculate that the consumer surplus is £100, as you paid £100 less than you were able and willing to pay.

500 – 400 = 100