# Meaning of consumer surplus

After you have worked through this section of the learning unit, you should be able to:

• describe consumer surplus and illustrate total consumer surplus using a diagram

### Economics 101 Proved Right, Thanks to Uber

by Bianca Disanto – October 14, 2016

In addition to mapping its demand curve, the depth and variety of data that Uber has collected over the years has allowed for consumer surplus to be accurately quantified for the first time. Consumer surplus is the economic term used to describe the difference between how much total utility or value you place on getting a good or service versus the price you actually paid for it. In other words, if you have ever purchased something and thought: "I would have paid a lot more for that," the difference between the maximum price you would have paid and the price you were charged is your consumer surplus.

Consumer surplus, like the demand curve, is a definition that appears in every economic textbook but is one that has not been able to be accurately quantified — until now. Since Uber has been able to trace how much people are willing to pay for their rides, they have also been able to determine how much they have "saved" consumers.

The results of these consumer surplus calculations are telling. When the

co-author of the New York Times bestselling book “Freakonomics”, Steven Levitt, worked with Uber, he determined that the company has generated \$7 billion in consumer surplus in New York, Los Angeles, San Francisco and Chicago alone. This illustrates that the benefit Uber offers to consumers far outweighs the losses incurred by taxi cab drivers in those cities.

Demand gives us an indication of the willingness and ability of buyers to purchase a good or service.

### Assuming that the market price of a piece of fried chicken is R4, consider the position at point C in the following diagram:

At point C, what are buyers willing to pay for a piece of fried chicken?

Correct.

At point C, they are willing to pay R6 for a piece of fried chicken. This R6 indicates the value they believe they receive from the product.

Think again.

At point C, they are willing to pay R6 for a piece of fried chicken. This R6 indicates the value they believe they receive from the product.

Think again.

At point C, they are willing to pay R6 for a piece of fried chicken. This R6 indicates the value they believe they receive from the product.

### Given that the market price is R4 and people are willing to pay R6 for a piece of fried chicken, how much do they pay for it at point C?

Think again.

At point C, they are paying the market price, namely R4, but they are willing to pay R6 – which is a measure of what they consider the value of the product to be.

Think again.

At point C, they are paying the market price, namely R4, but they are willing to pay R6 – which is a measure of what they consider the value of the product to be.

Correct.

At point C, they are willing to pay R6 for a piece of fried chicken. This R6 indicates the value they believe they receive from the product.

### What is the difference between what they are willing to pay for a piece of fried chicken at point C, and the price they actually pay?

Think again. They are willing to pay R6 but are only paying R4.

It is indeed R2.

The difference between what they are willing to pay for a piece of fried chicken (R6), and what they actually pay (R4) is R2, which is the consumer surplus for a piece of fried chicken at this point.

Think again. They are willing to pay R6 but are only paying R4.

Consumer surplus can therefore be defined as the difference between what consumers pay and the value they receive, as measured by the maximum price they are willing to pay.

### What is the consumer surplus for a piece of fried chicken at point F?

Think again.

They are willing to pay R5 but are only paying R4.

Think again.

They are willing to pay R5 but are only paying R4.

Correct.

At point F, the difference between what they are willing to pay for a piece of fried chicken (R5), and what they actually pay (R4) is R1, which is the consumer surplus for a piece of fried chicken at this point.

With the consumer surplus defined as the difference between what consumers pay and the value they receive, as measured by the maximum price they are willing to pay, we can now deal with the total consumer surplus.

#### Activity

Do the following activity to see if you have grasped the concept of consumer surplus:

### Assume the market price of an ice cream is R12 and you are willing to pay R17 for an ice cream.

1. If I am willing to pay R17 for an ice cream and the market price is R12, then the value in rand terms I receive is R _________.
2. I am prepared to pay R ____ for an ice cream.
3. The price I paid is R_____ for an ice cream.
4. My consumer surplus is R_____ for an ice cream.
5. If for some reason your willingness to pay for an ice cream decreases from R17 to R15 and the market price of ice cream is R12, what happens to your consumer surplus?
My consumer surplus (decreases, increases, stay the same).
1. Since you are willing to pay R17 for an ice cream, the value you receive is also R17.
2. If you are willing to pay R17 for an ice cream, that is the amount you are prepared to pay.
3. If the market price is R12, that is the price you will pay for it.
4. Your consumer surplus is R5. It is the difference between what you pay, R12, and the value that you receive, R17, which is the maximum price you are willing to pay.
5. Since consumer surplus is the difference between what you pay and the value you receive, your consumer surplus in this case will decrease from R5 to R3.
At a willingness of R17 and a market price of R12, your consumer surplus is R17 – R12 = R5. At a willingness to pay of R15 and a market price of R12, your consumer surplus is R15 – R12 = R3.