Finding consumer surplus

Consumer surplus is the difference between what you do pay for a good or service (i.e. the price) and the maximum that you would have been willing to pay. It makes sense to say that we’d only ever buy something if it’s worth more to us than the price we pay, but this has a nice outcome that is worth dwelling on.

Every purchase that we make delivers consumer surplus. When I paid £380,000 for my house it seemed like an awful lot of money, and I was pretty certain that the person who sold it would have accepted quite a bit less. But I also knew that I would have happily paid over £400,000. The difference of (at least) £20,000 constitutes my consumer surplus.

When you think about it, so much of our utility comes from consumer surplus. People often criticize companies that charge prices that are higher than the cost of production (i.e. for making “excessive” profits), but the other side of the coin is that consumers are always paying a price less than they value the good (“excessive” utility?).

A really good example of the concept of consumer surplus is the internet.

A nice assignment question is to think of something that has delivered consumer surplus to you, similar to the examples above. Feel free to collaborate on this slide deck: