Consumer Surplus Formula

Consumer Surplus Formula (Table of Contents)

• Consumer Surplus Formula
• Examples of Consumer Surplus Formula (With Excel Template)
• Consumer Surplus Calculator

Consumer Surplus Formula

Consumer surplus is the difference of amount between actual price and price willing to pay by a consumer for goods or services. Actual price is the initial price of goods or service whereas price willing to pay by a consumer is decided by a consumer on the basis of market testing, surveys etc. Price of the product is finalized by a company after market research and depends on demand and supply of product and service. The consumer surplus formula can be written as the maximum amount willing to pay by consumer minus the actual price of goods and service or initial price. The formula for consumer surplus can be expressed as:-

Examples of Consumer Surplus Formula (With Excel Template)

Now, let us see an example of Consumer Surplus Formula.

Example #1

A company came up with a new product that is auto dish cleaner, the company had conducted various market research and finalized its maximum price willing to pay $1,250 whereas the actual price of the product is $750.

Now, we will calculate consumer surplus using below formula

Consumer Surplus = Maximum Price Willing to Pay – Actual Price

Put the values in the above formula.

• Consumer Surplus = 1,250 – 750
• Consumer Surplus = $500

So, consumer surplus of auto dish cleaner is $500.

Example #2

Suppose, a consumer wants a television with 44 inches LED TV with HD quality and he is willing to pay $1,500 for it. He went to an electronics store and found that television with features he wanted is for a price of $1,200.

As we know,

Consumer Surplus = Maximum Price Willing to Pay – Actual Price

Put the value in the above formula.

• Consumer Surplus = $1,500 – $1,200
• Consumer Surplus = $300

Consumer surplus value is $300, here consumer has saved the same.

Explanation of the Consumer Surplus Formula

The formula for consumer surplus can be calculated by firstly, checking the consumer base and the highest price that consumer is willing to pay. Now, the initial price is already ready with the company and their subtraction will result in consumer surplus.

Now, let us see extended consumer surplus formula.

Extended Consumer Surplus Formula

In below image of consumer and producer surplus in perfect competition, triangle ABC is consumer surplus and another triangle ABC BCD reflect producer surplus. Here, point A and C represent maximum price, the consumer is willing to pay the market price respectively. Whereas, point B and Q corresponds to the quantity demand at equilibrium. Extended consumer surplus can be written as half of BC multiplies by AC or half of OQ multiplies by AC as OQ and CB is parallel.

Consumer and Producer Surplus in Perfect Competition

Formula for Extended Consumer Surplus can be expressed as:-

Consumer Surplus = ½ * BC * AC

Or,

Consumer Surplus = ½ * OQ * AC

Hence,

Explanation of the Extended Consumer Surplus Formula

Extended consumer surplus can be calculated this way. Firstly we need to draw supply and demand curve with quantity on the horizontal axis and price on the vertical axis.

Now, put the market price in equilibrium price. As per the law of supply and demand, the market price is a point of intersection between the demand curve and supply curve. Now a line needs to be created between the market equilibrium price and ordinate.

As we know, triangle ABC is consumer surplus and area of the triangle that is Consumer Surplus:-

Area of Triangle = ½ * Base * Height

Base = CB = OQ

Height = AC

Put a value in the above equation.

Consumer Surplus = ½ * CB * AC

And

Consumer Surplus = ½ * OQ * AC

Now, let us example to understand same.

Example #3

A consumer wants to buy high-tech car with all advanced features and he is ready to pay $1,000,000 which is the highest price among the customers and other customers are willing to pay only $800,000, Market price as per demand supply meet is $800,000. As per this price, car demand is 20 in equilibrium demand.

Let us find consumer surplus for the same.

As we know,

Consumer Surplus = ½ * (Maximum price willing to pay – Market Price) * Quantity

Put values in the above formula.

• Consumer Surplus = ½ * ($1,000,000 – $800,000) * 20
• Consumer Surplus = $2,000,000

So, consumer surplus is $2,000,000.

Example #4

Suppose, a company wants to calculate consumer surplus with the demand function i.e. Q_D which is (-0.06x + 60) and supply function Q_S is 0.06x.

Here, x is quantity.

Below is the function with change in quantity.

By the above table we got below values:-

Now, let us calculate Consumer Surplus,

Consumer Surplus Formula = ½ * (Maximum price willing to pay – Market Price) * Quantity

Put value in the above formula.

• Consumer Surplus = ½ * (60 -30) * 500
• Consumer Surplus = $7,500

So, consumer Surplus is $7,500.

Significance and Uses

There are multiple uses of consumer surplus equation which are as follows:-

• Consumer surplus equation helps in taking business pricing related decisions like pricing of selling of goods and services, the value of pricing.
• Consumer surplus equation helps in generating of maximum revenue as this company can get the best selling price with maximum revenue generation.

Consumer surplus is a very important element in business especially when re-pricing is done or new product needs to be launched. The consumer surplus is based on an economic theory of marginal utility.

Consumer Surplus Calculator

You can use the following Consumer Surplus Calculator

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