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• Part 1 of 2: Important concepts and terms
• Part 2 of 2: Calculating consumer surplus using a supply and demand graph
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Consumer surplus is a term used by economists to describe the cumulative difference between the amount consumers are willing to pay for a good or service and the current market price. Met talks about a consumer surplus when consumers are willing more pay for a good or service than they are currently paying. While it sounds like a tricky calculation, once you know what values ​​to use for the equation, it's actually quite easy.

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Part 1 of 2: Important concepts and terms

1. Understand the law of supply and demand. Most people have heard of the phrase "supply and demand" as a reference to the mysterious forces behind market economies, but many do not fully understand the full implications of these concepts. "Demand" refers to the desire for a good or service in the market. In general, if all other factors are equal, the demand for a product will fall as the price rises.
   • For example, suppose a company is about to release a new model of television. The more they charge for this new model, the fewer televisions they expect to sell, overall. This is because consumers have a limited amount of money to spend and paying for a more expensive television may have to forgo spending on other things that are more useful to them (groceries, gasoline, mortgage, etc.).
2. Understand the law of supply and demand. Conversely, the law of supply and demand dictates that expensive products and services are delivered at a rapid pace. The bottom line is that people who sell things want to earn as much as possible by selling all kinds of expensive products, so if a particular kind of product or service is very lucrative, then its producer will rush to produce more of that product or service. .
   • For example, suppose tulips have become very expensive right before Mother's Day. In response, farmers who produce tulips will pour resources into this activity to produce as many tulips as possible, in order to take advantage of the high market price.
3. Understand how supply and demand are displayed graphically. A common way that economists represent the relationship between supply and demand is through a two-dimensional x / y graph. Usually in this case the x axis is set as Q (the amount of goods in the market), and the y axis as the P. (the price of the goods). Demand is expressed as a curve sloping from the top left to the bottom right of the graph, and supply is expressed as an oblique curve from the bottom left to the top right.
   • The intersection of the supply and demand curves is the point where the market is in equilibrium - in other words, the point where producers produce exactly as many goods and services as consumers demand.
4. Understand marginal utility. Marginal utility is the increase in consumer satisfaction when consuming one additional unit of a good or service. In very general terms, the marginal utility of goods and services is subject to diminishing returns - in other words, each additional unit purchased brings less and less benefit to the consumer. Ultimately, the limiting utility of the good or service diminishes to the point that there is no "added value" for the consumer to purchase an additional device.
   • For example, suppose a consumer is very hungry. She goes to a restaurant and orders a hamburger for € 5. After this hamburger, that person is still a bit hungry and buys another hamburger for € 5. The marginal utility of this second hamburger is slightly less than that of the first because it is less satisfying in terms of satiety versus cost, compared to the first hamburger. The consumer decides not to buy a third hamburger because she is no longer hungry, and so the third hamburger is of virtually no marginal use to her.
5. Understand consumer surplus. Consumer surplus is broadly defined as the difference between the "total value" or "total value received" to consumers of an item and the actual price they are willing to pay for it. In other words, if consumers are willing to pay less for a product than it is worth to them, then the consumer surplus represents their "savings."
   • A simplified example: Suppose a consumer is looking for a used car. He has € 10,000 to spend. If he buys a car that meets all his needs for € 6,000, we can say that he has a consumer surplus of € 4,000. In other words, the car was worth $ 10,000 to him, but he ended up with the car and a surplus of € 4,000 to spend on other things as desired.

Part 2 of 2: Calculating consumer surplus using a supply and demand graph

1. Create an x ​​/ y chart to compare price and quantity. As mentioned above, economists use graphs to compare the relationship between supply and demand in the market. Since consumer surplus is calculated based on this relationship, we can use such a graph in our calculation.
   • As mentioned above, you set the y axis as P (price) and the x axis as Q (quantity of goods).
   • The different intervals along the axes will correspond to different values ​​- price intervals for the price axis and quantity of goods for the quantity axis, respectively.
2. Draw demand and supply curves for the goods or services being sold. Supply and demand curves - especially in earlier examples of consumer surplus - are usually presented as linear equations (straight lines in the graph). The statement about the consumer surplus that you have to solve may already have been shown in a supply and demand graph, or you may still have to draw yourself.
   • As with the explanation of the previous graph, the demand curve will be a downward line from the top left, and the supply curve will be an upward line from the bottom left.
   • The demand and supply curves will be different for each good or service, but should accurately reflect the relationship between demand (in terms of the amount of money consumers would potentially spend) and supply (in terms of the amount of goods purchased) .
3. Find the balance point. As discussed earlier, the equilibrium in the relationship between supply and demand is that point on the graph where the two curves intersect. For example, let's say the point of equilibrium is at 15 units with a price point of $ 5 / unit.
4. Draw a horizontal line on the price axis at the equilibrium point. Now that you know the equilibrium point, draw a horizontal line from that point perpendicular to the price axis. In this example, we know that the point will intersect the price axis at $ 5.
   • The triangular area between this horizontal line (the vertical line of the price axis) and the point where the demand curve intersects is the area corresponding to the consumer surplus.
5. Use the correct equation. Since the triangle corresponding to the consumer surplus is a right triangle (the equilibrium point intersects the price axis at an angle of 90 °) and the surface of this triangle that's what you want to calculate, you need to know how to calculate the area of ​​a right triangle. The equation for this is 1/2 (base x height) or (base x height) / 2.
6. Enter the corresponding numbers. Now that you know the equation and numbers, you can combine them.
   • In our example, the base of the triangle is the magnitude of the question at the equilibrium point, which is 15.
   • To determine the height of the triangle in our example, we subtract the price point of the equilibrium ($ 5) from the price point at which the demand curve intersects with the price axis (let's say $ 12 for the purpose of this example). 12 - 5 = 7, so we assume a height of 7.
7. Calculate the consumer surplus. After entering the values ​​into the equation, you are ready to solve the problem. According to the example: CS = 1/2 (15 x 7) = 1/2 x 105 = € 52.50.

Tips

• This number corresponds to the total consumer surplus, because the consumer surplus for an individual consumer is simply the marginal benefit to the consumer, or the difference between what he or she would have paid versus the amount actually paid.