What Is the Relevance of Consumer Surplus?
An economic term of significant importance to business and trade is consumer surplus. This is a concept associated with consumer perception and value. If a business is able to understand consumer surplus and apply its principles to everyday production, marketing and pricing, the business may experience greater revenue than if it hadn't considered the concept.
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Consumer Surplus Defined
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Sometimes a person is willing to pay more for something than he actually ends up paying. For instance, you might be willing to pay $25 for a book, but the store sells it to you for just $15. Consumer surplus is the difference between what you are willing to pay and what you actually spend. Put another way, consumer surplus is a measure of the value, or utility, consumers put on what they want to buy, minus the market price. In this example, your surplus would be $10.
Relationship to Price
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When a company raises its prices, but does not change the number of goods produced, fewer people can afford to purchase the goods. That means that the total amount of consumer surplus falls. Conversely, if prices go down, more people who are able and willing to pay can purchase the goods. When there is no consumer surplus, demand is said to be elastic, because whatever you pay equals what you are willing to pay.
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Manipulating the Consumer
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Companies that have a thorough understanding of the concept of economic surplus easily can manipulate consumers. For example, by lowering prices temporarily -- by having a sale, for instance -- the company can temporarily increase consumer surplus. When the consumer buys a good, he feels good because he perceives that he got a deal. This satisfaction is connected to the overall branding for the company. If the consumer is able to get a high surplus, he may view the company more positively, even though nothing about the product changed except cost. He may also use the "savings" to buy more products, thus leaving the store with more than he would have otherwise.
Price Discrimination
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Another way companies use consumer surplus is to price discriminate. Companies sometimes can identify people who are willing to pay more for a product or service. When this is possible, companies can charge different rates to different groups. For example, hotels may charge higher rates to individuals who don't make a reservation, while taxi cab companies can charge more to drive after a certain hour. Practicing varying forms of "price discrimination" is a way for a company to increase revenue by extracting the maximum amount of money from each consumer.
Trade and Competition
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Consumer surplus is connected to trade and competition. When there are more companies in the market, prices tend to be lower because companies have to compete with each other to sell goods. With good trade and consumer surplus, customer satisfaction and good brand experience is more likely to be higher because prices are kept low.
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References
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