The formula for consumer surplus is a measure of the economic benefit consumers receive when they are willing to pay more for a good than the price they actually pay. It can be calculated using the following formula:
[
\text{Consumer Surplus} = \frac{1}{2} \times \text{Quantity} \times (\text{Maximum Willingness to Pay} – \text{Market Price})
]
Components:
- Maximum Willingness to Pay: The highest price consumers are willing to pay for a given quantity of a good.
- Market Price: The actual price at which the good is being sold.
- Quantity: The number of units of the good being bought.
Interpretation:
- Consumer surplus represents the area between the demand curve and the market price on a supply-demand graph.
- If the demand curve is linear, the consumer surplus is the triangular area between the demand curve and the price line.
Example:
If a consumer is willing to pay $10 for a product, but the market price is $6, and they buy 4 units, the consumer surplus would be:
[
\text{Consumer Surplus} = \frac{1}{2} \times 4 \times (10 – 6) = 8
]
This means the consumer surplus is $8.