Chapter 20 Consumer
Updated 6/7/16 Please
Other Micro Chapters
I. Law of diminishing marginal utility
|Number Purchased||Total Utility||Marginal Utility||
II. Utility maximizing rule
|X costs $3||Y costs $2||Z costs $1|
III. Consumer's surplus
E. More on
Economic surplus From Wikipedia, the
free encyclopedia. The term surplus is used in
economics for several situations. The consumer
surplus (sometimes named consumer's surplus or
factors of production:
in perfect competition, no producer surplus accrues to the
individual firm. This is the same as saying that economic
profit is driven to zero. Real-world businesses
generally own or control some of their inputs, meaning that they
receive the producer's surplus
due to them: this is
normal profit, and is a component of the
opportunity costs. If the markets for factors are perfectly
competitive as well, producer surplus ultimately ends up as
economic rent to the owners of
scarce inputs such as land.
On a standard
supply and demand (S&D) diagram, consumer surplus (CS) is the
triangular area above the price level and below the demand curve,
If the government intervenes by implementing, for example, a tax or a subsidy, then the graph of supply and demand becomes more complicated and will also include an area that represents government surplus.
Combined, the consumer surplus, the producer surplus, and the
government surplus (if present) make up the social surplus or
the total surplus. Total surplus is the
A basic technique of
bargaining for both parties is to pretend that their surplus is
less than it really is: sellers may argue that the price they ask
hardly leaves them any
In some schools of
heterodox economics, the economic surplus denotes the total
income which the
ruling class derives from its ownership of scarce
factors of production,
The individual consumer surplus is the difference between the
maximum total price a consumer would be willing to pay (or
reservation price) for the amount he buys and
The maximum price a consumer would be willing to pay for a given
amount is the sum of the maximum price he would be willing to pay
for the first unit, the maximum
One bargaining tactic is to pretend a lower consumer surplus. The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on the figure of the aggregate demand curve.
Calculation from supply and demand
The consumer surplus (individual or aggregated) is the area under the (individual or aggregated) demand curve and above a horizontal line at the actual price (in the aggregated case: the equilibrium price). If the demand curve is a straight line, the consumer surplus is the area of a triangle:
Where Pmkt is the equilibrium price (where supply equals demand), Qmkt is the total quantity purchased at the equilibrium price and Pmax is the price at which the quantity purchased would fall to 0 (that is, where the demand curve intercepts the price axis). For more general demand and supply functions, these areas are not triangles but can still be found using integral calculus. Consumer surplus is thus the definite integral of the demand function with respect to price, minus the definite integral of the constant function D(P)=Qmkt (i.e. PmktQmkt), from the market price to the maximum reservation price (i.e. the price-intercept of the demand function):
The graph shows, that if we see a rise in the equilibrium price and a fall in the equilibrium quantity, then consumer surplus falls.
Distribution of benefits when price falls
When supply of a good expands, the price falls (assuming the
demand curve is downward sloping) and consumer surplus increases.
This benefits two groups of people.
Consider an example of linear supply and demand curves. For an initial supply curve S0, consumer surplus is the triangle above the line formed by price P0 to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands from S0 to S1, the consumers' surplus expands to the triangle above P1 and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.
Some people were willing to pay the higher price P0. When the price is reduced, their benefit is the area in the rectangle formed on the top by P0, on the bottom by P1, on the left by the price axis and on the right by line extending vertically upwards from Q0.
The second set of beneficiaries are consumers who buy more, and new consumers, those who will pay the new lower price (P1) but not the higher price (P0). Their additional consumption makes up the difference between Q1 and Q0. Their consumer surplus is the triangle bounded on the left by the line extending vertically upwards from Q0, on the right and top by the demand line, and on the bottom by the line extending horizontally to the right from P1.
Rule of one-half
The rule of one-half estimates the change in surplus for small changes in supply with a constant demand curve. Note that in this special case where the consumer demand curve is linear, consumer surplus is the area of a triangle. Following the figure above,
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IV. Consumer's and Producer's Surplus
A) Econ Concepts in 60 Seconds Video on Consumer's and Producer's Surplus
B) Allocation efficiency exists at the equilibrium quantity and at other quantities,
there are efficiency losses or Deadweight Loss.
Consumer Surplus from
Sites of Interest
V. Normal and Superior Goods
A. Normal Goods, consumers buy more as income rises,
B. Inferior Goods, lest as income rises.
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