Welfare economics attempts to quantify the benefits of market participation
for buyers and sellers. This benefit is called surplus. For the buyers it is called
Consumer surplus is based on the following idea. The demand curve reflects the consumers’ willingness to pay, i.e. the value that the individual buyers ascribe to the good. For all buyers who purchase a good, this value is higher than the price they pay for it, because otherwise they would not buy the product. The benefit that a consumer derives from the purchase of the good is the difference between the value ascribed by the consumer to the good (demand curve) and the price the consumer actually pays.
For example, if a consumer is prepared to pay a maximum of €2.00 for a cup of coffee and the cup costs €1.80, the difference of €0.20, represents the consumer surplus of this individual consumer. The consumer surplus of an entire market is the sum of all individual consumer surpluses.
Graphically, the consumer surplus is represented by the area between the demand curve and the price line, since this area is the respective individual benefit (demand curve - price) multiplied by the quantity. Formally, this results in
where is the
equilibrium price and
the equilibrium quantity. The consumer surplus is shown in color in the graphic
This graphic shows that if the price falls from to , the consumer surplus increases. This increase consists of two components. On the one hand, the consumer surplus of existing consumers increases, because their costs decrease due to the price reduction. On the other hand, the quantity demanded also increases, from to (either because of new consumers or because of an increase of demand from already active buyers) and this new consumption also generates consumer surplus.