What Is Consumer Surplus?
"Consumer surplus" is term used in economics to express the difference between how much a consumer paid for a good or service and how much extra he would have been willing to pay for that good or service.
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Example
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A consumer goes to a dollar store intending to buy a pair of flip flops for $1. Upon arriving, he learns that the shoes only cost 50 cents. Since he was willing to pay twice that, the consumer has a surplus of 100 percent.
How to Calculate Consumer Surplus
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Consumer surplus is subjective value related to consumer psychology. It is meaningful to economists only in the aggregate, as the value conferred on any one consumer is relative. However, as in the example above, if one knows the price a consumer is willing to pay for a product or service then she may subtract the actual purchase price from that amount to calculate consumer surplus.
Anticipated price - Actual price = Surplus
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Related Terms
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Consumer surplus is often used in welfare economics, and is considered--along with producer surplus--a type of Marshallian surplus. Consumer surplus is also a key to determine price elasticity.
History of the Concept
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Alfred Marshall, a neoclassical economist at Cambridge University, was the first to coin the term consumer surplus in his masterwork, Principles of Economics (1890).
Uses
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In order to determine pricing. Retailers will sometimes temporarily raise the price of a product to see what consumers are willing to pay. If the elasticity of the product is low enough--that is, if most of the consumers still buy the product--the retailer will know his consumers were experiencing a surplus.
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References
- Photo Credit Economic crisis image by Denis Ivatin from Fotolia.com
