Marginal utility of money remains constant :

This connotes that the customers’ tastes, preferences, and income will not change in any circumstances. While understanding the Consumers Surplus there are no available substitutes taken into consideration. No substitutes are available in the explanation : Thus, this is an assumption that Consumer Surplus consists of this explanation of Utility as well. For example, the utility derived from ice cream is 10 units. Under Marshallian economics, utility is expressed as a number. The consumer surplus theory explains that the value of utility is to be measured. Hence, in our example, CS = ½ (40) (70-50) = 400.įollowing are the assumptions of the consumer surplus theory: Thus, taking into consideration the demand and supply curves, the formula for consumer surplus as mentioned previously is Consumer Surplus = ½ (base) (height). While, the area which lies below the demand curve and above the equilibrium price is shaded in green, this area is called the consumer surplus (or CS). The area above the supply curve and below the equilibrium price is shaded in blue, in this zone the product surplus (or PS) is achieved.

The point where the demand and the supply curve meet are marked as the equilibrium price, that is 50. Demand Curve and Supply are drawn accordingly.

In the Quantity axis, the quantity is 40. In the Price axis, the prices are 70 and 50. The consumer surplus formula is CS = ½ (base) (height).įrom the above diagram, we will understand Consumer Surplus. The demand curve is a line of a graph that is utilized in economics, this line shows how many units of a good or service are purchased at different prices. In order to calculate the consumer surplus, we need to consider the factor of demand and supply. On the other hand, producer surplus means the price difference that is there between the lowest cost to supply the market and the actual price which the consumers are willing to pay. So, consumer surplus refers to the monetary gain that is enjoyed when a purchaser buys a product for a lesser value than they normally were willing to pay. While we discuss the consumer and producer surplus, it is very much important that we also understand some basic concepts that are used by economists to explain the interrelationship between the two.īoth the consumers and producer surplus can be graphically illustrated by either the demand curve or the marginal benefit curve and a supply curve or the marginal cost curve. In the above diagram, graphically, consumer surplus is being measured by the area of a triangle that gets formed below a demand curve (shaded in red color) and above the market price (P1).įurther, we will talk about it in detail in the Consumer Surplus formula. Here, we are going to provide insights on “What is Consumer Surplus?”, the method of calculating the surplus, and other important elements of the topic will be discussed.Ĭonsumers' surplus is a tool for measuring the consumer’s welfare and this surplus is defined as the excess of the social valuation of a product that goes over the price that is being actually paid. Consumer Surplus is an important study in the subject of Economics. In an economy, a consumer surplus takes place when the consumer is willing to pay more for a product than its market price. Consumer Surplus or Buyer’s Surplus is an economic measurement of the customer’s excess benefit.

Consumer and poducer