Consumer surplus measures the welfare that consumers derive from their
consumption of goods and services, or the benefits they derive from the
exchange of goods. Consumer
surplus is the difference between what consumers are willing to pay for a
good or service (indicated by the position of the demand curve) and what they
actually pay (the market price). The
level of consumer surplus is shown by the area under the demand curve and
above the ruling market price
demand for public transport shown in the diagram. The initial fare is price P1
for all passengers and at this price, Q1 journeys are demanded by
local users. At price P1the
level of consumer surplus is shown by the area AP1B. If the bus
company cuts price to P2 the demand for bus journeys expands to Q2
and the new level of consumer surplus rises to AP2C. This means
that the level of consumer welfare has increased by the area P1P2CB.
surplus = total willingness to pay for a good or service - the total amount
consumers actually do pay.
a zero fare is charged, consumers will demand bus journeys up to the point
where the demand curve cuts the x-axis. When demand for a product is
perfectly elastic, the level of consumer surplus is zero since the price that
people pay matches the price they are willing to pay. There must be perfect
substitutes in the market for this to be the case.
When demand is perfectly inelastic the amount of consumer
surplus is infinite. Demand is invariant to a price change.
Pricing And Consumer Surplus
pricing is becoming more common place with the diffusion of information
technology in the economy. Dynamic pricing is when the price the firm charges
to customers is sensitive to very short run changes in demand. For example,
Coca Cola is experimenting in raising the price of cans from vending
machines when the average temperature increases. Hotel bookings systems can
change room rates on offer in response to fluctuations in occupancy rates.
Changes in price to reflect certain market conditions can take advantage of
variations in consumers' willingness to pay for certain items.