In microeconomics, consumer surplus is a measure of welfare and thus the advantages that consumers can achieve in a market. The term pension stands for the advantage or benefit of a person. The consumer surplus expresses the willingness of customers to pay. The further the actual price is below what the customer is just willing to pay, the greater his consumer surplus.
In this lesson we explain the concept of consumer surplus and its importance in microeconomics. At the end of the lesson, we will also provide you with a few exercises.
English: Consumer surplus
Why is consumer surplus important?
According to sciencedict.com, the consumer surplus gives companies information about the willingness of their customers to pay. The better they know the consumer surplus, the more precisely they know how high they can set the price for a product before consumers forego the product. This also makes it possible to see in advance how customers will react to price changes.
Willingness to pay and individual consumer surplus
The consumer surplus is the difference between the actual price and the price a consumer is just about willing to pay. This is also known as the reservation price. An important factor when determining the consumer surplus is the willingness to pay and thus the upper price limit of the consumer for a certain good.
This willingness to pay can be used to determine how much a consumer appreciates or needs a good. The higher the appreciation or necessity, the higher the willingness to pay.
The individual consumer surplus can be derived from this :
The price actually paid for the goods is deducted from the willingness to pay. The result is the net benefit, ie the amount that the consumer has “saved”.
Example of individual consumer surplus
The owner of a car needs a set of new winter tires. He has already chosen a brand with which he has had good experiences and is ready to spend up to € 600 on the complete set. In a tire shop, he can find the tires he wants for € 450.
His consumer surplus is therefore calculated as follows :
|Willingness to pay||€ 600|
|price actually paid||– € 450|
|individual consumer surplus||= 150 €|
Aggregated consumer surplus
This principle can now be applied to all consumers who are interested in a particular product. To this end, the individual consumer surplus of all buyers of this product is added up.
Consumer surplus shown in aggregated form
The graphical representation takes place by means of the price sales function. At the equilibrium price, the consumer surplus is exactly zero. The equilibrium quantity is the intersection of the supply and demand curves.
In the event of a price decrease, the consumer surplus increases. First of all, the consumer surplus will increase for those customers who would have bought the good at the old price. As a result of the price decrease, demand increases, which is why the consumer surplus of those consumers who would buy the good for a price that lies between the new and the old price is added.
Consumer surplus: Influence of price changes on consumer surplus
Example of aggregated consumer surplus
Based on the last example, there are now 3 car owners who need a new set of winter tires. In addition to the one already mentioned above with a willingness to pay of € 600, there are now two others whose willingness to pay is € 500 and € 450.
The individual consumer surplus of the first customer is 150 € (600 – 450 €), that of the second is only 50 € (500 – 450 €). With the third driver, the maximum willingness to pay corresponds exactly to the price of the tires. As a result, the consumer surplus is exactly zero.
The individual consumer surplus is now added for the aggregated consumer surplus:
|Customer 1||150 €|
|Customer 2||+50 €|
|Customer 3||+ € 0|
|total||= € 200|