What Is Consumer Surplus? (And How to Calculate It)

By Indeed Editorial Team

Published 16 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies may consider a variety of factors when determining a pricing structure for their products. They can use information about the market and consumer habits to evaluate how much customers are willing to pay when purchasing goods and services and make informed pricing decisions. Understanding what to charge consumers for a product can help an organisation increase their profits and grow its client base.

In this article, we define what consumer surplus is, explain how to calculate it, discuss the differences between consumer and producer surplus and address frequently asked questions related to this concept.

What is consumer surplus?

Consumer surplus, also called buyer's surplus, is an economic measure that evaluates the difference between the price customers may pay for a product and the actual price of the item. Calculating it can help a company evaluate whether they're charging the right amount for a good, and whether their prices align with consumers' expectations and standards. When this figure is lower, it creates a higher producer surplus and greater inequality within the market. This means market competition helps to keep this figure relatively high, because if there's less competition the market inequality may rise, causing this figure to drop.

The formula you can use to calculate this measure is:

Consumer surplus = Maximum price willing to pay - Actual price

Related: Producer Surplus: What It Is and How to Calculate It

How to calculate consumer surplus

You can use online calculators to calculate this figure, but you can also make the calculations yourself by following these steps:

1. Plot your demand curve

The demand curve is a graphic representation of how much consumers want a product. Demand refers to how many people want to purchase an item or service. You can calculate demand by plotting a graph that details how many units of the product consumers may purchase relative to its price. Typically, as the price decreases, the quantity of demand increases. To create your graph, you can plot the price vertically along the Y-axis and the quantity of demand horizontally along the X-axis.

Related: How to Write a Demand Planner Resume (With Tips and Example)

2. Plot your supply curve

The supply curve is a graphic representing the relationship between a product's cost and the producer's supply. You can plot the price vertically along the Y-axis and the quantity of supply horizontally along the X-axis. This line shows that the price is dependent on the quantity of supply. Plotting this line on the same graph as your demand curve can offer you important information about pricing your product.

Related: Analytics in the Supply Chain (With Types and Examples)

3. Find the equilibrium

Where the supply curve and the demand curve meet is the equilibrium. Your equilibrium can be a good data point to know when deciding the price of your product because it's the centre of what you can supply and what customers want to pay for your product. Once you know the point of your product's equilibrium, you can find this measure. On your graph, it's the section below the demand curve but above the equilibrium point. This section of the graph plots how much a consumer may consider paying for your product regardless of supply quantity.

Related: What Is Predatory Pricing? (Plus a List of Price Strategies)

4. Find the area of the triangle

The equilibrium point and the demand curve create a triangle on your graph. You can continue to calculate this measure by determining the area of that triangle using the following formula.

Consumer surplus = (1/2) x base x height

Additionally, suppose your set price differs from your equilibrium point. In that case, you can find the surplus by using the above calculation to subtract the set price from the maximum price consumers are willing to pay.

Example calculation

Here's an example of finding this measure for a company that sells bags of coffee beans.

Karl produced 80 bags of coffee beans. Karl sold his bags of coffee beans at a fair to test the market and pricing structure. He priced the bags at $20 and didn't make a sale. Karl lowered the price to $15 and sold 20. He lowered the price to 10 and sold 50 bags of coffee. He lowered the price to $8 and sold all 80 bags of coffee. Karl found his equilibrium at $8 and 80 bags of coffee.

Some customers were willing to buy his product for $15, indicating a consumer surplus. If he plots his experience in a graph, he can find the triangle area between his equilibrium point and the demand curve that would show him his this figure. He can also use the equation to calculate this figure by subtracting $8 from $15, which would equal $7.

FAQs about consumer surplus

Here are some answers to frequently asked questions about this economic topic:

How does the law of diminishing marginal utility affect this figure?

The law of diminishing marginal utility is the economic theory that states the more someone consumes a product, the less satisfaction they derive from each purchase. This means a consumer is less likely to buy multiple units of the same product. For example, if you sell toothbrushes, consumers may want to buy one toothbrush for $2. According to the law of diminishing marginal utility, they won't want to buy a second toothbrush for a higher price because their satisfaction is less than the original purchase. The law states that the following equation is true:

Consumer surplus = total utility - (price x quantity)

Related: What Does an Economist Do? Types, Duties and Skills

What is the difference between this figure and producer surplus?

This measure differs from producer surplus because it depends on consumer preferences and evaluates the maximum amount they may be willing to pay. Alternatively, producer surplus evaluates the minimum price a company can charge and still make a profit on the goods and services it sells. One figure compares the market price against the highest possible price while the other evaluates how the market price compares against the lowest possible price.

Both values allow a business to analyse its pricing and determine whether it allows them to remain competitive within the market while still yielding enough profit to keep the organisation growing. The point where these two figures meet is the equilibrium point, and highlights the price point where both consumers and a business may benefit. Reaching the equilibrium point can help a company keep consumers satisfied with their prices while still providing the organisation with enough earnings to thrive.

Related: What Is a Supply Chain Manager?

Does elasticity impact this measure?

Elasticity is the potential impact of elements aside from a product or company on consumers' willingness to purchase a good or service. This means it evaluates the effect of external factors on product demand. For example, during a recession, consumers may be unwilling to purchase certain items. This means that those items have high elasticity since external factors can easily influence consumer demand for this product. If an item is inelastic, this means customers are willing to pay whatever a company charges for the product, making its consumer surplus infinite.

Related: A Detailed Guide to a Career in Logistics: 7 Types to Explore

Does this theory make assumptions about the market or consumers?

When you're calculating this figure, it's necessary to make a few assumptions about a product and the pricing, including:

  • Measuring products individually: When using this formula, you can only calculate this figure for one product at a time. This means you're unable to make substitutions and that you only evaluate the demand and pricing of items individually.

  • Ignoring external factors that may impact demand: When calculating this figure, you assume that external factors don't affect a product's demand. This means you don't consider buying trends or economic shifts, that may have an impact on pricing.

  • Using the law of marginal utility: When evaluating this figure, you may rely on the law of marginal utility, which disregards consumers' potential interest and enjoyment in another, similar product that may lead them to make a purchase from a market competitor.

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