Question

What is consumer surplus? How is it illustrated on a demand and supply diagram?

Short answer

The difference between what consumers would have been prepared to pay and what they actually spent is used to determine the extra benefit consumers receive from acquiring a good or service.

Step-by-step solution

Concept introduction

Consumer surplus is the additional advantage consumers gain from purchasing a good or service, calculated as the difference between what they would have been prepared to pay and what they actually spent.

Explanation of solution

Consumer surplus is the extra benefits consumers receive from buying a good or service, as measured by the difference between what they would have been willing to pay and what they actually paid.

Consumer surplus is the space below the demand curve and above the equilibrium price level, as shown in the diagram.

The consumer surplus is represented by the triangle APE in the diagram above.

Example of concept

In the preceding picture, if the equilibrium price is 'P', the purchasers who were willing to pay more than the equilibrium price receive consumer surplus since they may purchase the good at a lower price than they were proposing. The consumer surplus is represented by the area of the triangle APE.