Consumer Surplus

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    Consumer surplus is a measure of the benefit or welfare that consumers derive from consumption. Consumer surplus is the difference between what consumers are willing (and able) to pay and what they actually pay. Consumer surplus is the area between the demand curve and the market price.

    The demand curve shows the maximum price consumers are willing and able to pay to buy different quantities of a good. Consumers are willing to pay a high price for the first unit they buy but a lower price for each extra unit they buy. Although, consumers only pay the market price P* for each unit.

    At the market price P* consumers buy Q* units of output so they spend a total amount equal to the blue area. However, consumers are willing to pay the yellow and blue areas. Consumer surplus is the difference between the two, the yellow area.

    An increase (decrease) in demand increases (decreases) consumer surplus.

    Consumer surplus is originally the orange and yellow areas. After demand increases, the demand curve shifts rightwards from D to D’, equilibrium price rises from P* to P’ and output rises from Q* to Q’. The new consumer surplus is the red and orange areas. Consumer surplus falls a bit because a higher market price is paid but consumer surplus rises a lot because more is consumed. Overall, consumer surplus increases because the gain in consumer surplus (the red area) is greater than the loss in consumer surplus (the yellow area).

    An increase (decrease) in supply increases (decreases) consumer surplus.

    Consumer surplus is originally the yellow area. After supply increases, the supply curve shifts rightwards from S to S’, equilibrium price falls from P* to P’ and output rises from Q* to Q’. The new consumer surplus is the yellow and orange areas. Consumer surplus rises a lot because a lower market price is paid and more is consumed.

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