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Consumer Surplus Meaning and How to Maximise Your Satisfaction Levels
Consumer Surplus Meaning
If you are a layman, please know that Consumer Surplus is that extra satisfaction that you derive by procuring a good or service that is always more than the level of satisfaction you could otherwise have expected before foregoing your money.
Normally when you go for a purchase, you will be paying a certain amount of money as its price. The price gets determined according to your need for that commodity. If it is essential for you, then you may be willing to pay even higher prices to obtain that.
This willingness to pay extra money for any goods or services determines the extra satisfaction you are deriving from that commodity. This is known as your consumer surplus.
Suppose you are paying one Dollar to get a cup of ice cream for which, otherwise, you are willing to pay even two Dollars as you are urgently in need of it, the extra one Dollar that you didn't have to pay is your surplus satisfaction.
Consumer Surplus Definition in Economics
In economics, consumer surplus is defined as the difference 'between the amount that consumers are willing and able to pay to obtain a good or service and the actual amount (which is the market price) that they are paying for it'.
So, it is the amount of difference between their willingness to pay more price for it (rather than forego it) and the actual price of that commodity that is termed as Consumer Surplus.
Consumer Surplus Explained in Economics for Beginners Book
This book deals in a very comprehensive manner all the basic concepts of economics that are inter-related with the "Law of Consumer Surplus" like the basic concept of human wants, supply curve, demand curve, producer surplus, consumer equilibrium, the problem of shortage and other many related concepts which affect the consumer decisions and thereby their consumption activities. A peek through this book can be of much help in guiding your consumption activities thereby achieving maximum satisfaction levels. This is my own experience and I hope it will work for you too.
Kindle E-Book on Economics Basics
Further Clarification of the Concept of Consumer Surplus
So, you are able to see that the consumer is enjoying higher satisfaction by paying a lower market price for the commodities.
As the good or service is very important and essential for him, he would have otherwise paid higher prices than forego it. But, due to the market price of it which is low, he is deriving extra satisfaction in terms of money.
This satisfaction is known as the utility in economics. This extra utility is derived by him without paying any money for it. Because he is paying only the market price which is lesser than the actual price that he would have paid to procure it at any cost.
This extra utility derived is the consumer surplus. Generally, consumers will be enjoying consumers' surplus from most of the goods and services under normal circumstances.
Consumer surplus is deemed to be a part of "economic surplus" which includes both 'consumer surplus' and ' producer surplus'. The term economic surplus is also referred to as Marshallian surplus as it is introduced by Alfred Marshall.
Alfred Marshall, Great Economist
Consumer Surplus Examples and Illustrations
You can understand the concept of consumer surplus with the help of these examples.
Consider you are thirsty. You go to a shop and purchase one 100 ml pouch of water to quench your thirst. You will experience a great satisfaction. You want to drink some more water and buy another pouch. Now the satisfaction you derive will be of lesser degree. You will feel comfortable now.
Suppose you paid 10 cents for one pouch of water. You would have paid even one dollar for the first pouch to quench your thirst because you are suffering from thirst since long. So, as you would have otherwise paid100 cents (one Dollar) for it, the surplus 90 cents that you need not pay is your consumer surplus.
Suppose, that after drinking one pouch of water, you took another pouch for which you could have paid 80 cents to have it otherwise. In this case, the surplus satisfaction derived by you is 80 - 10 = 70 cents. So, 70 cents is your consumer surplus in this case.
Let us consider another example of procuring bread. The price of one loaf of bread is, say, $2. A person consumes 2 loafs and for the first loaf he would have paid $5 since he is too much hungry and for the other one, he would be willing to pay $3. But, he purchased both loafs @$2 each. We can represent the consumer surplus derived by him through this below table for bread as well as water.
Consumer Surplus Example
price willing to pay
Actual price paid
First loaf of bread
Second loaf of bread
First pouch of water
$1 (100 cents)
Second pouch of water
How to Measure Consumer Surplus
Consumer surplus is measured by economists with the help of a formula known as consumer surplus formula.
It is indicated in a graph as "the area in between the line forming demand curve and the line forming the equilibrium point of demand and supply curves". If the demand curve is a straight line, then the area of consumer surplus will be that of a triangle formed by connecting these points as shown in the figure below.
It is treated as the average extra satisfaction derived through various combinations of prices and consumption points. Different price levels produce different satisfactions. So, the extra satisfaction is the sum total of all points forming on the demand curve. It can be either a straight line or a sloping curve.
So, consumer surplus is the area forming above the price line and below the demand curve. The price line is the base of a triangle, and the line connecting equilibrium price to the highest price willing to forego is the perpendicular, and the line connecting the point of highest price with the point of quantity purchased at equilibrium price is the hypotenuse of the triangle.
Consumer surplus = Triangle area = half * base * height (when demand curve is straight line)
In the below image, D1 - D2 is the demand curve and S1- S2 is the supply curve. Both are intersecting at equilibrium point E. P is the price paid for attaining equilibrium E. So, the consumer surplus is the area of the triangle formed by D1, P, E points.
In another image, it is not a triangle. So, the consumer surplus is the area covered by the green-colored figure for which the triangle formula will not work.
Consumer Surplus Graph
Illustration of Consumer Surplus Through Video
About Above Consumer Surplus Video
In the above video, the instructor has described two examples of consumer surplus.
One example assumed the price that one may be willing to forego as 10 and the actual price paid and equilibrium point as 5. So the consumer surplus is the difference of 10 - 5 = 5 multiplied by half base (which is shown as half*5*5 =12.5).
The other example assumed the price that he may be willing to forego as 8. So, the extra utility enjoyed is 8 - 5 = 3 multiplied by half of base = half of 3 (as the equilibrium point, in this case, is 3). So, consumer surplus is half*3*3 = 4.5.
Exploitation of Consumers Using the Concept of Consumer Surplus
- Consumers are always believed to be at the receiving end and as the gainers enjoying more utility than the actual prices paid by them in any economy.
- So, producers tend to take advantage of this fact and try to restrict their consumer surplus.
- Price fixing is done taking into account this factor of consumer surplus surpassing the actual cost of production.
- As producers generally aim at profit maximisation, they can fix more high prices for their products thereby reducing the quantum of consumer surplus.
- They can indulge in price discrimination tactics also by fixing prices at various levels for each region or class of people.
- Monopoly businesses can control the market with high prices as there will be no competition in their fields.
Consumer surplus evaluation
Do you think about your surplus satisfaction levels while shopping?
How to Maximize Your Consumer Surplus
- By applying some prudence, you can always try to maximize your derivation of consumer surplus.
- One best principle is to look for alternatives that can give you the same levels of satisfaction.
- Either you can entirely shift to another similar product or you may procure some quantity of one and some more quantity of other brands which are available easily at same prices with same levels of utility.
- You may need to keep watch on available new or alternative products that can satisfy your needs.
- One more possibility is to control your consumption. You need to stop when your satisfaction is enough on reaching that particular situation.
- Do not indulge in unnecessary purchases only to show your prominence or superiority. The utility derived from such purchases is very low and extra sacrifice will be much like a burden on your future needs.
- But, you can keep stocks of goods that provide more surplus satisfaction to you at lesser prices if you think them to be of much importance to you on a regular basis in future also.
- Seasonal purchases can give you much surplus satisfaction at lower prices as there will be discount offers and much scope to choose from alternatives. You need to be careful to purchase only those things which are of importance in satisfying your needs.