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What is a Consumer Surplus?

Consumer surplus refers to the discrepancy between what a company is willing to pay for a product and what it actually costs.
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Consumer surplus is the quantity, which is difficult to measure, represented by the difference between what a person would be willing to pay for an item, and the actual price paid. Typically, in the study of microeconomics, consumer surplus is represented on a supply and demand graph as a triangular area under the demand curve, and above the market price. It is somewhat related to producer surplus, which is basically another term for the profit that a producer makes on the sale of a product.

Unlike producer surplus, which is measurable in actual currency, consumer surplus is an intangible value. A simple way to think of consumer surplus is to imagine the many experiences we have all had as consumers when something cost less than we decided was the maximum we were willing to pay. For example, consider a consumer at a fruit stand who wants to purchase an apple. There is no posted price on the stand, but the person thinks to himself that he will not pay more than $0.50 U.S. Dollars (USD) for the apple. When the vendor tells him that the apple costs $0.35 USD, the man purchases the apple, and his consumer surplus is the $0.15 USD difference.

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In fact, something like this happens every time a purchase is made. When a consumer buys something, the implication is that the item was worth more to him than the money it cost to buy it. If this were not the case, a sale would not happen.

The above example simplifies the nature of consumer surplus compared to how it affects us in the real world. In any given situation, consumer surplus is almost impossible to quantify exactly, for two reasons. The first reason is that it is difficult to get someone to reveal the maximum price he would be willing to pay for something. The consumer may not have even given it much thought beforehand, which is what happens on a grocery shopping trip for most of us; we purchase items for whatever their indicated price is, as long as it seems reasonable.

This leads into the second reason, namely that most people are not sure of the maximum price they would pay for an item, because our preferences may change often. To use a practical example, an ice cream cone may be "worth" much more during a heat wave than it would a week later when the weather cools down. Even though it is hard to measure, consumer surplus is still a highly important concept in economics, since it measures the gain that a buyer receives from a purchase.

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SZapper
Post 7

@indemnifyme - I have a feeling companies probably already do make use of this concept. Even if consumer surplus isn't an exact number, I'm sure they use the concept when they price out products.

Anyway, I think that online auction sites would actually be a great resource to do research on consumer surplus. Most people who use online auctions usually have to enter a number of their maximum bid.

So they're basically saying how much they'd be willing to pay for the item. You could then compare that to what the item sells for, and find out what the consumer surplus was on that item.

indemnifyme
Post 6

@starrynight - Good point. I'm kind of glad that consumer surplus isn't an exact number. Just imagine what companies would do if they were able to get their hands on data like this? I can just picture a consumer surplus graph in a meeting room, with a bunch of business people plotting about how they could increase their profits.

This is just a theory, but I think that most people are willing to pay more than they actually do for certain items. Or, put another way, even if things get more expensive, people still buy them. (Gas is a good example of this.)

So if companies were somehow magically able to find the consumer surplus, I think prices would go up!

starrynight
Post 5

The consumer surplus definitely is a very interesting concept that I haven't heard about before. It's especially interesting because it can change over time. I know I personally place greater value on items at certain times.

For instance, if I really, really need something I'm usually willing to pay more for it. But at a later date, I might not want to pay as much for the same item, because I don't need it. But I doubt that I could ever give an exact figure for my consumer surplus on most things I buy. I imagine other people are probably the same way.

sunshined
Post 4

@John57 - That reminds me of a garage sale I went to where you were to name your price. This was at a church, so all of the money raised was going for missions work.

The 'cheap' side of me wanted to get something as low as possible, but I also didn't want to feel like I was taking advantage of the situation and not support the cause.

I also found this a little uncomfortable. I am sure it probably saved them a lot of time not putting a price on every single item, but there were some things where I didn't even begin to know what to offer them.

Because of this, I just didn't even bother. I have wondered if they would have made more money if they had just priced the items. At most garage sales I have been at, many people ask if you will come down in price anyway.

I had never thought of a garage sale being a place where you thought much about consumer surplus, but anytime there is a transaction where something is bought or sold, this is a factor to be considered.

John57
Post 3

When I studied economics in college I remember reading about several consumer surplus examples in my textbook.

The best example of this for me was when we went shopping in Mexico. At most of the places we visited they don't have a price on anything.

The shop owners are waiting to find out from you how much you are willing to spend on something. I know some people who really love to do this, but I never felt comfortable with it.

I would rather have a price placed on an item, and then make a decision if I want to spend that much money on it or not.

Mykol
Post 2

I am the type of person who will spend time and effort to find the lowest price on something I want.

I have some friends who never think much about the price of something. If they want it, they just go buy it and pay whatever it is priced at.

Though I am not comfortable haggling over the price of something, I will often wait until something is on sale or drastically reduced in price before purchasing it.

I imagine there are several other people out there like this. I can see how this would make it hard for companies to pinpoint the economics of consumer surplus.

Everybody has a different way of thinking and a different amount of money to spend on something. I don't think I would do very well as a business owner as I think it would be very hard to determine what the best price would be to sell something at.

bagley79
Post 1
As a small business owner, it can be almost impossible to calculate consumer surplus. I have a small boutique, and anytime I go to place a price on something I try to put myself in the shoes of the consumer.

I want to sell products consumers want, at a price they are willing to pay, yet I still need to make a profit to stay in business.

I have found that many times it depends on the popularity of the item. People are willing to spend more for something if it is new and trendy. I am often amazed at how much someone is willing to spend on something like this - especially if they are hard to find at other places.

If I am selling items that everyone has and there is a large supply of them, it is much harder to make as big of a profit.

Another reason it can be hard to figure out consumer surplus is because the consumer, on a whole, is very finicky. It can be very difficult to try and predict what and how much someone is willing to spend for an item over a specific period of time.

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