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Consumer surplus in microeconomic theoryis the net benefit1 an individual gains in consuming a good or service. It is the total benefit of consumption (sometimes called utility) less the utility lost due to the payment of the good’s price.

Typically consumer’s surplus is measured by the area beneath an individual’s demand curve and above the line indicating price (see Figure 1).

Figure 1 Demand and consumer surplus

Price ($)
        | \
        |  \
        |   \
        |    \
        |  a  \
        |      \
     p  |-------\
        |        \
        |         \
        |          \
        |           \
        |            \ Demand

The downward sloping line represents a consumer’s demand. At a price, p, the consumer’s surplus is represented by the triangular area, marked “a”, above the price line and below the demand curve.

Utility and consumer surplus are measures of consumer welfare or well-being. When pressed, most economists accept that welfare measures are only ordinal, that is, only allow the ranking of alternatives. For example, if a person gains more (respectively) utility (consumer surplus) from one activity than another, then it can only be said (allowing for price) that the person prefers the former to the latter. It cannot be said by how much the person prefers one option to another. As a result, (1) a consumer’s surplus gained from sun-baking cannot be added to the consumer’s surplus gained from guy-watching to obtain the combined surplus of doing both, (2) comparisons of one person’s well-being with another’s are impossible, and (3) the summing of surplus over different persons, is not possible. However, in practice it is common to do all of these things (for example, it is common to say that for the demand function of a group of individuals the area equivalent to that of “a” in Figure 1 represents consumer surplus of that group of individuals).

Comparisons and summations of consumer surplus would have a good theoretical foundation if the monetary value that individuals place on their consumer’s surplus measured it in a comparable way. Several assumptions are known to legitimate the use of the area under the demand curve and above the price line as a measure of consumer surplus, for example, if the marginal utility of money does not vary with prices, or is independent of income and prices (Takayama, 1987, 607, 610-12, especially at 610).2 Weaker assumptions also suffice (Takayama, 1987, 612).

1 See Webster’s second definition of benefit, and also his second definition of profit.

2 In either of these cases, consumer surplus becomes a cardinal measure of benefit (Takayama, 1987, 610, 611).

Akira Takayama, Consumer surplus, The New Palgrave: A Dictionary of Economics, Ed by John Eatwell et al, Vol. 1, MacMillan ISBN 0-935859-10-1 (set) pp. 607-13.
Consumer surplus is basically the difference between what you are willing to pay for something and the price you actually pay for it, the consumer's gain from trade. (Do not confuse consumer surplus with utitily; consumer surplus has a definite dollar value, but utility does not, as WoOs explains in his well-written node)

For example, today I bought a new book for $17. I was willing to pay a maximum of $20 for the book, so I earned a consumer surplus of $3. I walked out of the store $3 richer than I walked in; I walked out with merchandise I valued at $20 but I had only paid $17 for it.

Consumer surplus is closely related to producer surplus (basically if the book had cost $18, you would have had one less dollar of surplus but the producer/seller would have had one more.) Click here to see how you can talk about welfare and surplus to make an argument against taxes.

prices  |              supply curve
        | \    \       /
        |a \ b  \     /
      p1|___\____\   /
        |  c \d | \ /
        | f   \g|h/|\
      p3|_______|/ | \
        |       /\ |  \
        | PS   /| \|   \
        |     / |  \    \
        |    /  |  |\    \
        |   /   |  | \    \
        |  /    |  |  \    \
        | /     |  |   \    \
        |/      |  |    \    original demand curve
        |       |  |     \
        |       |  |      demand curve with tax  
                q1 q2     quantity 

Without the tax, the consumer has the area above price below demand as consumer surplus. The producer has the area below price above supply. Before the demand curve drops due to the tax, we are opperating along the upper demand curve, so consumer surplus is (a + b + c + d + e) and producer surplus is (f + g + h + PS).

Once the tax is in place, fewer items are sold (quantity sold drops from q1 to q2). The tax money is not a deadweight loss; if we assume the government is not wasting the money (doing something that does not improve anyone's welfare anywhere), then the welfare from that money is going somewhere. If they give the revenues from the sales tax to someone on social security, then that person is exactly as much better off as the consumer and producer are worse off, and there is no net loss to society. (If you believe the government is using your money to roll joints, there is a definite deadweight loss there.)

With the tax, consumer surplus drops to a + b and producer surplus is simply PS. The area (c + d + f + g) goes as tax revenue. However, area ( e + h) is still a deadweight loss; without the tax someone was receiving that benefit and now no one is.

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