4.a. Consumer Surplus.

Consumer surplus is the buyer's profit from buying a good. Put another way, it is the excess of what a buyer would have been willing to pay for a good over what he actually had to pay for that good. Graphically, it is the area below the demand curve, above the price, and left of the quantity bought

Example: You might be willing, if you had to, to pay $20 to make an important phone call. If the price you actually have to pay for that phone call is $1, then you earn a "profit" (consumer surplus) of $19 when you make the call.

Figure 4.a.1

In figure 4.a.1, we suppose there are 4 consumers: A, B, C, and D. A is willing to pay $9 for one unit of the good. B will pay $8, C will pay $7, and D will pay $6. If the going market price of the good is $6 per unit, then A earns a "profit" (i.e., consumer surplus) of $3, since he was willing to pay $9 but only had to pay $6. Similarly, B earns $2 of consumer surplus (CS), and C earns $1 of CS. Customer D, the so-called "marginal" consumer, is willing to pay $6 for a unit, but since the market price is $6, D gets no consumer surplus.

In practice, consumer surplus is pictured as in figure 4.a.2, as the area below the demand curve, above the price, and left of the quantity bought.

Figure 4.a.2

Figure 4.a.2 shows that when price is $7, consumer surplus is $30 (the yellow area). If the price falls to $4, existing consumers save $3 per unit on the 10 units they were already buying, for a gain of $30 (green) in consumer surplus. In addition, 4 more units are sold to buyers who wouldn't have wanted the good for $7, but who do want it for $4. These buyers gain $6 (blue) of consumer surplus when price falls from $7 to $4.