Source: Image of Consumer Surplus Graph created by Kate Eskra
Hi. Welcome to Macroeconomics. This is Kate. This tutorial is on the consumer surplus. As always, my key terms are in red, and my examples are in green. So in this tutorial, we'll define consumer surplus, we'll talk about some examples of consumer surplus, and you'll be able to recognize the area of consumer surplus given a demand curve.
So for this tutorial, I need you to keep in mind what demand is all about. And demand is about wanting something, obviously, but also being able and willing to afford it or pay for it. So very often, we refer to demand as willingness to pay.
I give an example in another tutorial about my demand for Granny Smith apples. They're my favorite. So here, I am saying that at these different prices, here's how many I would purchase each week. OK? So if we plot the points with price on the y-axis and quantity on the x-axis, we get our demand curve. And the relationship between price and the quantity demanded is a negative one or inverse. As price falls, I want to buy more. As price rises, I want to buy less.
So we can see that each of these price and quantity combinations really is showing a consumer's, or my, willingness to pay. If we were to do this for a market graph, these figures would just be obviously much bigger-- how much all consumers in total would be willing to purchase at the various prices. But the question now is, what if I could get apples cheaper than what I'm really willing to pay for them? Doesn't that happen all the time?
That's the idea of consumer surplus. Consumer surplus is determined by the difference between what we actually pay for something and the highest amount that we are willing to pay for the good. So it happens all the time. Have you ever gotten a better deal on something than you expected? Maybe you were willing to pay $100 to go see a concert that you really like, but you were able to buy a ticket from someone for $60. In this example, you enjoyed a consumer surplus of $40. So that's consumer surplus on a personal level.
So here, if we go back to our demand curve with apples, we can see that-- let's say the price is $1. So you can go to the grocery store and purchase apples for $1. So notice I did make the same market curve now. So this is 3,000 bushels of apples would be demanded a day at the current price of $1. Well at that price of $1, yes, 3,000 people are willing to purchase them, or 3,000 bushels would be purchased. All of these people are on the demand curve up here.
So there are people willing to purchase them for as much as $1.75, or maybe even a little bit higher-- $1.50, $1.25, just over $1. All of these people up here on the demand curve are actually willing to pay more than the current price of $1. But it's not as if the grocery store says, oh, they look like they want to pay more, so we'll charge them more. You can't do that. It's a certain price. So that's why this area here, the green area, is the total amount of consumer surplus.
This area down here would just be how much consumers are spending. So there's 3,000 being purchased, times $1, would equal all of the revenue being spent by consumers. And this area is the surplus, the difference between what people are willing to pay and what they had to pay. All of these people down here on the demand curve really aren't relevant because they would not purchase. They're only willing to purchase an apple at a lower price than the current $1 price. So what that area's really showing us is the total benefit received by consumers who are paying a lower price than what they're willing to pay.
So in this tutorial, we talked about how consumer surplus is the difference between what we are willing to pay and the market price, and you saw the area of consumer surplus on that graph, which is everything below the demand curve down to the market price. Thank you so much for listening. Have a great day.
Determined by the difference between actual price paid for a good and the highest amount the consumer would have willingly paid for the good.