Consumer Surplus

What Is Consumer Surplus?

Consumer surplus is the net benefit buyers receive from participating in a market: the difference between the maximum amount they are willing to pay for a good and the amount they actually pay. On a supply-and-demand graph it is the area below the demand curve and above the market price, up to the quantity purchased. Because the demand curve reflects each buyer's willingness to pay, everyone who values the good above the market price captures surplus on their purchase. A lower price expands consumer surplus by adding buyers and increasing the gap for existing ones; a higher price shrinks it.

Why It Matters

Consumer surplus turns the abstract idea of gains from trade into a measurable area on a graph, letting economists judge how policies affect buyers. Together with producer surplus, it makes up total surplus, the standard measure of the total value a market creates. At the competitive equilibrium, and absent externalities, total surplus is maximized and the outcome is allocatively efficient. Policies that push a market away from equilibrium, such as a binding price ceiling, a tax, or a monopoly restriction, typically reduce total surplus and create deadweight loss, part of which is lost consumer surplus. Measuring consumer surplus is therefore central to cost-benefit analysis and to evaluating who gains and who loses from market interventions.

Test Your Knowledge

Questions on this topic from the EconRecall fact bank:

• What is consumer surplus?
  The difference between what consumers are willing to pay and what they actually pay — the area below the demand curve and above the market price
• In AP Microeconomics, what is true of total surplus at the competitive market equilibrium, absent externalities?
  The sum of consumer and producer surplus is maximized, and the outcome is allocatively efficient
• What effect does a tariff generally have on domestic consumers of the taxed good?
  They pay higher prices and buy less, so consumer surplus falls