consumer surplus (idea)

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
        |_____________\_______
                      quantity/time

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).

---

Footnotes
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).

---

References
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.