Is the difference between the maximum price consumers are willing to pay for a product and the lower equilibrium price?

In mainstream economics, economic surplus, also known as total welfare or Marshallian surplus (after Alfred Marshall), refers to two related quantities. Consumer surplus or consumers’ surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay. Producer surplus or producers’ surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for; this is roughly equal to profit (since producers are not normally willing to sell at a loss, and are normally indifferent to selling at a breakeven price)

On a standard supply and demand diagram, consumer surplus is the area (triangular if the supply and demand curves are linear) above the equilibrium price of the good and below the demand curve. This reflects the fact that consumers would have been willing to buy a single unit of the good at a price higher than the equilibrium price, a second unit at a price below that but still above the equilibrium price, etc., yet they in fact pay just the equilibrium price for each unit they buy.

Likewise, in the supply-demand diagram, producer surplus is the area below the equilibrium price but above the supply curve. This reflects the fact that producers would have been willing to supply the first unit at a price lower than the equilibrium price, the second unit at a price above that but still below the equilibrium price, etc., yet they in fact receive the equilibrium price for all the units they sell.

Consumer surplus

Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay. If a consumer is willing to pay more for a unit of a good than the current asking price, they are getting more benefit from the purchased product than they would if the price was their maximum willingness to pay. They are receiving the same benefit, the obtainment of the good, with a smaller cost as they are spending less than they would if they were charged their maximum willingness to pay.[3] An example of a good with generally high consumer surplus is drinking water. People would pay very high prices for drinking water, as they need it to survive. The difference in the price that they would pay, if they had to, and the amount that they pay now is their consumer surplus. The utility of the first few litres of drinking water is very high (as it prevents death), so the first few litres would likely have more consumer surplus than subsequent litres.

The maximum amount a consumer would be willing to pay for a given quantity of a good is the sum of the maximum price they would pay for the first unit, the (lower) maximum price they would be willing to pay for the second unit, etc. Typically these prices are decreasing; they are given by the individual demand curve, which must be generated by a rational consumer who maximizes utility subject to a budget constraint. Because the demand curve is downward sloping, there is diminishing marginal utility. Diminishing marginal utility means a person receives less additional utility from an additional unit. However, the price of a product is constant for every unit at the equilibrium price. The extra money someone would be willing to pay for the number units of a product less than the equilibrium quantity and at a higher price than the equilibrium price for each of these quantities is the benefit they receive from purchasing these quantities. For a given price the consumer buys the amount for which the consumer surplus is highest. The consumer’s surplus is highest at the largest number of units for which, even for the last unit, the maximum willingness to pay is not below the market price.

Consumer surplus can be used as a measurement of social welfare, first shown by Willig (1976). For a single price change, consumer surplus can provide an approximation of changes in welfare. With multiple price and/or income changes, however, consumer surplus cannot be used to approximate economic welfare because it is not single-valued anymore. More modern methods are developed later to estimate the welfare effect of price changes using consumer surplus.

The aggregate consumers’ surplus is the sum of the consumer’s surplus for all individual consumers. This can be represented graphically as shown in the above graph of the market demand and supply curves. It can also be said to be the maxim of satisfaction a consumer derives from particular goods and services.

Consider a market for tablet computers, as shown in Figure 1. The equilibrium price is $80 and the equilibrium quantity is 28 million. To see the benefits to consumers, look at the segment of the demand curve above the equilibrium point and to the left. This portion of the demand curve shows that at least some demanders would have been willing to pay more than $80 for a tablet.

For example, point J shows that if the price was $90, 20 million tablets would be sold. Those consumers who would have been willing to pay $90 for a tablet based on the utility they expect to receive from it, but who were able to pay the equilibrium price of $80, clearly received a benefit beyond what they had to pay for. Remember, the demand curve traces consumers’ willingness to pay for different quantities. The amount that individuals would have been willing to pay, minus the amount that they actually paid, is called consumer surplus. Consumer surplus is the area labeled F—that is, the area above the market price and below the demand curve.

The supply curve shows the quantity that firms are willing to supply at each price. For example, point K in Figure 1 illustrates that, at $45, firms would still have been willing to supply a quantity of 14 million. Those producers who would have been willing to supply the tablets at $45, but who were instead able to charge the equilibrium price of $80, clearly received an extra benefit beyond what they required to supply the product. The amount that a seller is paid for a good minus the seller’s actual cost is called producer surplus. In Figure 1, producer surplus is the area labeled G—that is, the area between the market price and the segment of the supply curve below the equilibrium.

The sum of consumer surplus and producer surplus is social surplus, also referred to as economic surplus or total surplus. In Figure 1, social surplus would be shown as the area F + G. Social surplus is larger at equilibrium quantity and price than it would be at any other quantity. This demonstrates the economic efficiency of the market equilibrium. In addition, at the efficient level of output, it is impossible to produce greater consumer surplus without reducing producer surplus, and it is impossible to produce greater producer surplus without reducing consumer surplus.

If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

In mainstream economics, consumer surplus is the difference between the highest price a consumer is willing to pay and the actual price they do pay for the good (which is the market price of the good). In other words, consumer surplus is the difference between what a consumer is willing to pay and what they actually pay for a good or service.

Economic surplus refers to two related quantities: consumer surplus and producer surplus. The producer surplus is the difference between the actual price of a good or service–the market price–and the lowest price a producer would be willing to accept for a good.

Economic surplus is calculated by combining the surplus benefit that is experienced by both consumers and producers in an economic transaction.

• In mainstream economics, economic surplus refers to two related quantities: consumer surplus and producer surplus.
• Consumer surplus is the difference between the highest price a consumer is willing to pay and the actual price they do pay for the good, or the market price.
• The producer surplus is the difference between the actual price of a good or service–the market price–and the lowest price a producer would be willing to accept for a good.
• Economic surplus is calculated by combining the surplus benefit that is experienced by both consumers and producers in an economic transaction.

A consumer is an individual who purchases products and services. Consumer surplus is one way to determine the total benefit that consumers receive from their goods and services. If a consumer is willing to pay more for an item than the current asking price–the market price–then they are theoretically receiving an additional benefit by purchasing the item at that price. If the price was their maximum willingness to pay, theoretically, they would get less benefit from the purchased product.

For example, before making a purchase, most consumers decide how much they are willing to spend on an item. Suppose there is a college student that decides that a pair of sneakers is worth no more than $80. If the price of the sneakers is $100, then the student may decide not to buy them. However, if the price of the sneakers is $60, the student will likely make the purchase. They may also feel like they got a special deal. And in economic terms, they've experienced a surplus of $20: the difference between the maximum amount the student was willing to spend ($80) and the market price of the sneakers ($60).

For consumers, a surplus represents a monetary gain because they are able to purchase an item for less than the highest price they would be willing to pay.

In an economic transaction, a producer is the entity or individual that manufactures goods and services. When a producer sells a product, it must determine a price for that product.

Suppose that the manufacturer of the sneakers must spend $30 to manufacture, market (advertise), and distribute each pair of sneakers. The manufacturer of the sneakers doesn't want to lose money by selling the shoes, so $30 is the minimum they would be willing to charge for the sneakers. Because the manufacturer wants to create a profit, they will likely elect to charge far more than $30 for the sneakers. The manufacturer must then choose a price that will make the sneakers attractive for a large number of consumers. (While they may be tempted to price the sneakers at a high price–like $200, $300, or $500–in order to garner a huge profit, this would likely be unsuccessful because many consumers would consider this price too expensive.)

If the price of the sneakers is $60, then the sneaker manufacturer will earn a profit of $30 on each pair of sneakers that is sold. This profit is also known as the producer surplus.

For every economic transaction, there may be both producer surplus (or profit) and consumer surplus. The aggregate–or combined–surplus is referred to as the economic surplus.

The French civil engineer and economist, Jules Dupuit, first developed the concept of consumer surplus in the mid-19th century. However, it was the British economist Alfred Marshall who popularized the term in his book "Principles of Economics" published in 1890). In fact, economic surplus is sometimes referred to as Marshallian surplus, after Alfred Marshall.

In traditional economics, the intersection of the supply and demand curves provides the market price (also called the equilibrium price) and quantity of a good. Before the supply curve and the demand curve intersect, there are many points where the price that consumers are willing to pay for a good is lower than the price that producers are willing to accept.

At the market (equilibrium) price, then, a surplus is created for both parties: consumers who would have paid more only have to pay the market price, and suppliers who would have accepted less receive the market price. The extra benefit that both consumers and suppliers get in the transaction is referred to as the economic surplus.

On a supply and demand diagram, consumer surplus is the area (usually a triangular area) above the equilibrium price of the good and below the demand curve. The point at which a price stabilizes–so that both consumers and producers receive maximum surplus in an economy–is known as the market equilibrium.

This area reflects the assumption that consumers would be willing to buy a single unit of the good at a price higher than the equilibrium price, plus a second additional unit at a price below that (but still above the equilibrium price). However, what they actually end up paying is just the equilibrium price for each unit they buy.

Likewise, in the same supply and demand diagram, the producer surplus is the area below the equilibrium price but above the supply curve. This reflects the assumption that producers would have been willing to supply the first unit at a price lower than the equilibrium price, and an additional (second) unit at a price above that (while still below the equilibrium price). However, in the market economy, producers receive the equilibrium price for all the units they sell.