Consumer Surplus: Definition, Formula & Examples

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  • 0:03 What Is Consumer Surplus?
  • 0:35 What Determines Surplus?
  • 1:13 Who Creates Consumer Surplus?
  • 1:59 Consumer Surplus Formula
  • 2:17 Examples
  • 3:59 Lesson Summary
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Lesson Transcript
Instructor: Jarvista Rivers

Jarvista has an MBA and a BS in business administration.

In this lesson, we will explore the meaning of consumer surplus and how we engage and create it in our day to day purchasing decisions. The formula and examples provided will further demonstrate how it is calculated and what drives it.

What Is Consumer Surplus?

At first glance, the term 'consumer surplus' might seem like it just means more than enough or an over abundance for consumers. However, based on current economic research, consumer surplus is defined as the difference of a consumer's willingness to pay for a product, service, or good and the actual price of it. In other words, the difference between what we will pay compared to the actual price of something determines the amount of surplus. Actual price is initial price of the product.

What Determines Surplus?

Surplus is based on the consumer's individual perception. Since the surplus is the difference of what the consumer is willing to pay versus what the consumer actually pays, we have to understand what determines this difference. In economics, we say that this difference is determined by the value placed on the product, good, or service. The value could be associated with the enjoyment, happiness, longevity, endurance, security, and/or satisfaction produced by purchasing the item. For example, my willingness to pay over the actual price for a leather jacket is based on the value of longevity, endurance, and enjoyment.

Who Creates Consumer Surplus?

We, the people are the consumers. We create surplus. People as consumers drives the cost of goods or services based on desires and demand. Before an item hits the market, producers and manufacturers have already researched the probability of consumers' purchases and a range of how much they may pay for it. This is done with various tools like surveys, coupons, or market testing. For example, before that new toy robot hits the market, the manufacturer has determined which demographics to market to, what type of advertisement to use, and what should be an initial price. However, the value the consumers place on the purchase is what ultimately determines the surplus based on what they are willing to pay over the actual price.

Consumer Surplus Formula

Consumer Surplus = willingness to pay - actual price

Lets take the toy robot scenario and plug in these numbers into the formula:

  • Actual price of product = $10
  • Amy is willing to pay $15 for the product
  • Amy's surplus is $5

$15 - $10 = $5

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