CONSUMER SURPLUS

1
CONSUMER SURPLUS

• PRINCIPLES OF MICROECONOMICS

Dr. Fidel Gonzalez Department of Economics and
Intl. Business Sam Houston State University
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OPPORTUNITY COST
MARGINAL ANALYSIS
Elasticity
Elasticity
SUPPLY
DEMAND
MARKET EQUILIBRIUM
CONSUMER SURPLUS, PRODUCER SURPLUS AND TOTAL
SURPLUS
MARKET EFFICIENCY
MARKET FAILURE
Pigouvian Taxes Quotas Coase Theorem Command and
control
EXTERNALITIES
TAXES
PUBLIC GOODS
COMMON GOODS
ARTIFICIALLY SCARCE GOODS
GAME THEORY
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Review consumer surplus
Remember this example
for one beer I am willing to pay 10
for two beers I am willing to pay 18
for three beers I am willing to pay 25
for four beers I am willing to pay 31
4
Review consumer surplus
From the previous slide we obtained the demand
schedule and demand curve.
Below the table you can see the graph of the
marginal willingness to pay for the first,
second, third and fourth beer.

The marginal willingness to pay for the first
unit is 10
10
The marginal willingness to pay for the second
unit is 8
8
The marginal willingness to pay for the third
unit is 7
7
6
The marginal willingness to pay for the fourth
unit is 6
Beers
4
3
2
1
5
Consumer surplus
Assume that I go to the bar and I find out that
the price of beer is 5.
Lets obtain the consumer surplus for each beer.
Consumer Surplus willingness to pay for a good
minus the price paid for it.
For my first beer I am willing to pay 10 but I
only have to pay 5
The Consumer Surplus for the first beer is 10
5 5
For my second beer I am willing to pay 8 but I
only have to pay 5
The Consumer Surplus for the second beer is 8
5 3
For my third beer I am willing to pay 7 but I
only have to pay 5
The Consumer Surplus for the third beer is 7
5 2
For my fourth beer I am willing to pay 6 and I
have to pay 5
The Consumer Surplus for the fourth beer is 6
5 1
6
Consumer surplus
Now, lets get the consumer surplus for the total
amount of beers that I can drink
If I only drink one beer my consumer surplus is
the same as the consumer surplus of drinking my
first beer, 5.
5
If I drink two beers, I get the consumer surplus
from the first beer (5) and the consumer surplus
from the second beer (3), the total consumer
surplus of drinking two beers is 538
5
3


8
If I drink three beers, I get the consumer
surplus from the first beer (5), the consumer
surplus from the second beer (3), and the
consumer surplus from the third beer (2), the
total consumer surplus of drinking three beers is
53210
5

3

2

10
If I drink four beers, I get the consumer surplus
from the first beer (5), the consumer surplus
from the second beer (3), the consumer surplus
from the third beer (2), the consumer surplus
from the fourth beer (1), the total consumer
surplus of drinking four beers is 532111
5

3

2

1

11
7
Put all the previous information in a table and
in a graph

The consumer surplus from the first beer is 5
10
The consumer surplus from the second beer is 3
8
The consumer surplus from the third beer is 2
7
The consumer surplus from the fourth unit is 1
6
1
2
3
5
5
Price 5
The total consumer surplus for the four beers is
the shaded area in the graph and it is equal to
532111
4
3
2
1
Beers
8
Consumer surplus
The final issue is to see the consumer surplus
for a linear demand curve.
The Consumer Surplus is the shaded are above the
price and below the demand curve.

Remember that we graphed the demand curve by
using the data on marginal willingness to pay and
quantity.
P
D
Quantity
Q
9
Consumer surplus
Question Why is the Consumer Surplus
important? Answer The consumer surplus measures
the net benefit the consumer receives from
participating in the market. Therefore, the
consumer surplus is the welfare of the
consumer. For example in our previous example
I value my first beer in 10 but I pay 5 dollars
for it so my net benefit from buying my first
beer is 10-5 5. The benefit from drinking my
first beer is 10 but I have to pay 5 to get it
to the net benefit is my benefit from drinking
the beer minus the price I pay to get it.

10
8
7
6
1
2
3
5
5
Price 5
4
3
2
1
Beers
10
Consumer surplus
Now it is your turn to work out an example
The following table shows the willingness to pay
for Itunes songs, fill out the empty cells, and
then graph the demand curve for Itunes songs
showing the consumer surplus for each unit. What
is the total consumer surplus?
What will be the total consumer surplus if the
price is 4
In the following slide you will see the answer,
please work out the problem before you look at
the solution.
11

6
Total consumer surplus is 11
5
If the price is 4 the total consumer surplus is
3, in order to do this you need to get the
marginal consumer surplus for each unit. Clearly,
in the consumer surplus is negative the consumer
will never buy that unit because in the net he
losses.
4
2
1
3
4
5
1
4
3
2
1
songs
12
Consumer surplus and price changes
Now, we are going to analyze how the consumer
surplus changes when the price changes. Imagine
that the initial price is P1 and the price
decreases to P2.
When the price is P1 the CS is A . When the price
decreases to P2 the CS is now ABC. The
consumer surplus increases when the price goes
down. This is not surprising, the consumer gets a
higher net benefit when he pays a lower
price. The change in CS is given by the areas B
C

A
P1 P2
When the price decreases a higher quantity is
purchased. Hence, the area B represents the extra
consumer surplus that goes to consumers that were
already buying the good when the price was P1.
B
C
D
Quantity
Q1 Q2
13
Consumer surplus and price changes
Now imagine that the price increases from P2 to
P1
In this case, the consumer surplus decreases when
the price goes up. The consumer gets a lower net
benefit when he pays a higher price. The change
in CS is given by the areas B C
When the price decreases a higher quantity is
purchased. Hence, the area B represents the loss
of consumer surplus to consumers that remain in
the market. The area C represents the loss in
consumer surplus to consumers that are not in the
market anymore.

A
P1 P2
B
C
D
Quantity
Q1 Q2
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Consumer surplus and price changes
Therefore, the area B is the extra consumer
surplus to old consumers. The area C is a
consumer surplus due to the fact that the
quantity in the market has increased as a result
of the price decrease. This new consumer surplus
goes to consumers that were not in the market
before because the price has too high for them.
When the price decreases new consumers enter the
market and their consumer surplus is represented
by C. Hence C represents the consumer surplus to
new consumers.

A
P1 P2
B
C
D
Quantity
Q1 Q2