Glossary

Consumer Surplus

When you buy something for less than the maximum you would have been willing to spend, you pocket a bonus. That bonus is called consumer surplus. Say you would have paid up to $50 for a concert ticket, but the price is$ 30. You hand over $30 and walk away with$ 20 worth of value you never had to give up — that $20 is your consumer surplus.

Formally, consumer surplus measures the difference between a buyer's willingness to pay — the highest price they would accept — and the price they actually pay, summed across every unit sold in the market. On a standard supply-and-demand diagram, willingness to pay is read off the demand curve at each quantity. Because buyers who value the good most highly are at the top of that curve, consumer surplus appears as the area under the demand curve and above the market price line, stretching from zero to the quantity traded $Q^*$ . When the demand curve is a straight line, that area is a triangle, which makes it straightforward to calculate. Together with producer surplus, consumer surplus forms total surplus — the standard measure of market welfare studied in AP Microeconomics Unit 2, IB Economics 1.4, and the welfare section of the supply-and-demand model.

CS = \tfrac{1}{2} \times Q^* \times (P_{\max} - P^*)

Consumer surplus (linear demand)

For a linear demand curve, consumer surplus is the area of a triangle — half the base times the height.

P_{\max}

is the choke price where the demand curve meets the vertical axis (the highest any buyer would pay);

Q^*

is the quantity traded at equilibrium;

P^*

is the market price.

Willingness to pay: The maximum price a buyer would accept for one unit of a good, equal to the height of the demand curve at that quantity. Consumer surplus exists whenever willingness to pay exceeds the market price $P^*$ .
Producer surplus: The mirror image of consumer surplus on the seller's side — the difference between the price a seller receives and the minimum they would have accepted. See producer surplus.
Total surplus: $CS + PS$ , the combined gain to buyers and sellers from all trades in a market. Total surplus is maximized at the competitive equilibrium, where the quantity traded reaches $Q^*$ and no mutually beneficial transaction is left unmade.
Deadweight loss: The portion of potential total surplus that is destroyed when output falls below $Q^*$ — for example, because of a tax, price control, or monopoly. See deadweight loss.