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Introduction to Consumer Surplus

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What Is Consumer Surplus?
Economists are quick to point out that markets create economic value for both producers and consumers. Producers get value when they can sell goods and services at prices higher than their costs of production, and consumers get value when they can buy goods and services at prices less than how much they actually value said goods and services. This latter type of value represents the concept of consumer surplus.

In order to calculate consumer surplus, we need to define a concept called willingness to pay. A consumer's willingness to pay (WTP) for an item is the maximum amount that she would pay. Therefore, willingness to pay amounts to a dollar representation of how much utility or value an individual gets from an item. (For example, if a consumer would pay a maximum of $10 for an item, it must be the case that this consumer gets $10 of benefits from consuming the item.)

Interestingly enough, the demand curve represents the willingness to pay of the marginal consumer. For example, if demand for an item is 3 unit at a price of $15, we can infer that the third consumer values the item at $15 and thus has a willingness to pay of $15.

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