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What is consumer surplus and how to maximise your satisfaction levels

Updated on December 20, 2016
Venkatachari M profile image

Venkat is well experienced in Accounts & Economics . He dealt with Balance Sheets, Budgets, Cost sheets, Financial statements for 25 years.

What is consumer surplus

If you are a layman, the consumer surplus can be understood as the extra satisfaction that you derive by procuring a good or service that can be more than you could otherwise have expected by foregoing your money.

Normally when you go for a purchase, you will be paying a certain amount of money as its price. It 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.

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.

About Economics for Beginners Book

This book deals with all basic concepts of economics like human wants, supply curve, demand curve, consumer surplus, producer surplus, consumer equilibrium, the problem of shortage and other many related concepts in a simple language.

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, economist

Source

Easy to grasp 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. You would have paid even one dollar for the first pouch to quench your thirst. So, as you have paid only 10 cents 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 and for the other he would be willing to pay $3. But, he purchased both loafs @$2 each. We can represent the consumer surplus derived by him from the below table for bread as well as water.

Consumer Surplus example

Particulars
price willing to pay
Actual price paid
Consumer surplus
First loaf of bread
$5
$2
$3
Second loaf of bread
$3
$2
$1
First pouch of water
$1 (100 cents)
10 cents
90 cents
Second pouch of water
80 cents
10 cents
70 cents

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 will be that of a triangle formed by connecting these points as shown in the figure.

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.

Consumer surplus Graph

Triangle formed by joining the points of D1, P, E is the quantum of consumer surplus in this graph.
Triangle formed by joining the points of D1, P, E is the quantum of consumer surplus in this graph. | Source

Illustration of consumer surplus through video

About 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?

See results

How to maximise your consumer surplus

  • By applying some prudence, you can always try to maximise 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 alternate 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.

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    • Venkatachari M profile image
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      Venkatachari M 21 months ago from Hyderabad, India

      Thank you, Missy. I am completely unaware of it. Just, I opened my computer and seeing my mail. I was really feeling a bit uneasy seeing there is no comment about my latest hub. Thank you a lot for informing me. I am going to the hub to rectify it. Thanks once again and my blessings.

    • Missy Smith profile image

      Missy Smith 21 months ago from Florida

      Hey Venkatachari, I'm stopping by this hub again to tell you that I just read your most recent hub; https://hubpages.com/literature/Moral-lessons-and-...

      but it has no comment section. I'm not sure you are aware of this, so I thought I should tell you. :)

    • Venkatachari M profile image
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      Venkatachari M 22 months ago from Hyderabad, India

      Thank you, sriv.

    • sriv profile image

      Parul Srivastava 22 months ago from Lucknow,India

      Sir, your hub is very informative.Thanks.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you Chitra, for the visit and nice comment. I am glad that you are mindful while shopping and unknowingly you are applying this concept of maximising your surplus satisfaction.

      Consumer surplus is the quantitative measurement of this satisfaction which you are enjoying by paying a little lesser than otherwise you would have been forced to pay, as you can not forego that goods which is very essential for you.

      Thanks once again and blessings.

    • ChitrangadaSharan profile image

      Chitrangada Sharan 22 months ago from New Delhi, India

      Very interesting hub and you have made some very important points about how to maximise consumer satisfaction. I understand the concept you tried to explain but the term consumer surplus is new to me.

      I am a very thoughtful shopper and do not buy anything on impulse. In other words I value the money whether mine or anybody else's.

      Great hub and thanks for enlightening me!

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you Rajan, for your visit and this nice comment. My best wishes to you.

    • rajan jolly profile image

      Rajan Singh Jolly 22 months ago from From Mumbai, presently in Jalandhar,INDIA.

      Thanks for this lesson in economics. For one totally new to the subject and the term this was enlightening. Thank you.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      I am very much humbled by your nice comment, Surabhi. I also studied Economics as a subject with Philosophy in my Degree course during 1969 to 1972. I will look at your article also in due time.

      Thanks for the visit and a great comment.

    • profile image

      Surabhi Kaura 22 months ago

      Venkatachari ji,

      You are a star! You have written this hub very eloquently and intelligently. I highly commend you for this. Economics has always been one of my favourite subjects during college. There’s much more than ‘demand and supply’ and you’ll be pleased to know that I had written one article a few years back on Economics from an anthropological perspective. Really liked this article... filled with pearls of wisdom. Thank you for educating me further. Bhala ho.

    • Venkatachari M profile image
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      Venkatachari M 22 months ago from Hyderabad, India

      Thank you Nitya, for the visit and leaving a nice comment.

    • Vellur profile image

      Nithya Venkat 22 months ago from Dubai

      Informative and useful hub, clearly explained. Now I know what consumer surplus is, thank you for sharing.

    • profile image

      manatita44 22 months ago

      Nice answer. I like it. Peace.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Manatita, that's a good perception. Apply it in spirituality. You always get surplus satisfaction and bliss in spirituality by being a little bit mindful of love, kindness and generosity. Whenever you indulge in small acts of benevolence and gratitude, you will experience lots of satisfaction. That is like reaping consumer surplus.

      Thanks for your visit and nice comment.

    • manatita44 profile image

      manatita44 22 months ago from london

      An interesting Hub. I do not always apply this, at least not consciously. Perhaps you can give an example to show how we can utilize this in Spirituality. I'm sure we can. Much Love.

    • Venkatachari M profile image
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      Venkatachari M 22 months ago from Hyderabad, India

      Nice to see you, Dora. Thanks for the visit and a nice comment.

    • Venkatachari M profile image
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      Venkatachari M 22 months ago from Hyderabad, India

      Thank you, Dana Tate. I am honoured with your nice comment. Thanks for the visit and comment.

    • MsDora profile image

      Dora Weithers 22 months ago from The Caribbean

      The calculations are over my head, but I certainly understand "How to maximise your consumer surplus." Thank you for these explanations.

    • Dana Tate profile image

      Dana Tate 22 months ago from LOS ANGELES

      Your research is fantastic. I can see you put a lot of thought into this article. very insightful and useful.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you, Larry, for the visit and nice comment.

    • Larry Rankin profile image

      Larry Rankin 22 months ago from Oklahoma

      Wonderful overview and analysis.

    • Jackie Lynnley profile image

      Jackie Lynnley 22 months ago from The Beautiful South

      A very happy new year to you too!

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you very much, Hari Prasad. You summed up it in a nutshell.

      Many thanks for the visit and nice comment. Wish you a Happy New Year and all my blessings.

    • shprd74 profile image

      Hari Prasad S 22 months ago from Bangalore

      Venkatachari Sir,

      In a nut shell, the mantra of keeping personal economics is

      "Buy what is needed, not what you want".

      Very comprehensive and theoretical way of looking at consumerism (habits of purchasing).

      Concepts of economics are very useful to understand, how businesses run, without specifics about profit making tactics used by businesses.

      Thank you sir for the gyan.

      - Hari

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you Missy. Very glad to see you here and leave a nice comment. Thanks for it. Wish you a Happy New Year.

    • Missy Smith profile image

      Missy Smith 22 months ago from Florida

      I definitely try to shop sensible. Interesting article and very informative. Lots of good stuff here.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Nice to see you, Bill. But, these terms are much familiar for Economics students. Supply, Demand, supply curve, demand curve, consumer surplus and producer surplus all these are important chapters.

      Anyway, thanks for the visit and nice comment. Happy New Year to you too.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you, Eric, for the visit and important feedback. Seasonal produce tends to be cheap during its season. You can purchase lots and keep stock. But, storing is a problem.

      Wish you a Happy New Year.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you Devika, for the visit and a nice comment and also for tweeting it.

    • billybuc profile image

      Bill Holland 22 months ago from Olympia, WA

      My goodness, I hadn't heard this term since my senior year in Economic's class in college. Very informative and nice summation.

      Happy New Year my friend.

    • Ericdierker profile image

      Eric Dierker 22 months ago from Spring Valley, CA. U.S.A.

      Very interesting and informative. I always thought only of the satisfaction of the goods. However somethings I like just because they have a low price. Seasonal produce is bothersome -- I pay more but it tastes worse.

    • DDE profile image

      Devika Primić 22 months ago from Dubrovnik, Croatia

      You shared an informative and useful hub. The valuable points mentioned is of great help to many individuals. I Tweeted.

    • Venkatachari M profile image
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      Venkatachari M 22 months ago from Hyderabad, India

      Nice to see you, John. That's great to see you dealing so prudently always. Your wife also seems much intelligent. I also take much care in all my shoppings. I tell my son also to do so.

      Thanks for your visit and nice comment.

      Wish you a very Happy New Year.

    • Venkatachari M profile image
      Author

      Venkatachari M 22 months ago from Hyderabad, India

      Thank you Jackie Lynnley, I am very glad to see you as the first commenter on this hub. Thanks for the visit and encouraging comment.

      Wish you a very very Happy New Year.

    • Jodah profile image

      John Hansen 22 months ago from Queensland Australia

      Very interesting article Venkat. I always shop around for the best deal and very rarely buy anything I don't need. My wife often sends me grocery shopping because she knows I will only buy what is on the list and search for the best price.

    • Jackie Lynnley profile image

      Jackie Lynnley 22 months ago from The Beautiful South

      Outstanding article! You have done such a great job on this I just can't think of enough nice things to say about it. The information, detail and photos bring it altogether! Shared.