Supply curve shift

Consumer surplus or Consumer's surplus (or in the plural Consumers' surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. The gain is the difference between the price they are willing to pay (or reservation price) and the actual price. If someone is willing to pay more than the actual price, their benefit in a transaction is how much they saved when they didn't pay that price. File links The following pages link to this file: Supply and demand Induced demand Categories: GFDL images ... File links The following pages link to this file: Supply and demand Induced demand Categories: GFDL images ... Consumers are individuals or households that consume goods and services generated within the economy. ... In microeconomics, the Reservation Price is the maximum price a buyer is willing to buy a good or service, or the minimum price a seller is willing to sell a good or service. ... In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ...

The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on a supply and demand figure. If demand is as given as the diagonal line from the price axis to the quantity axis, consumers' surplus in the case of a the initial supply curve (S₀) is the triangle above the line formed by price P₀ to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands (to S₁), the consumers' surplus expands, to the triangle above P₁ and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.

Distribution of benefits

The benefits can be thought to accruing to two groups.

The first, those who were willing to pay the higher price P₀, benefit because of a price reduction. Their benefit is the area in the rectangle formed on the top by P₀, on the bottom by P₁, on the left by the price axis and on the right by line extending vertically upwards from Q₀.

The second set of beneficiaries are new consumers, those who will pay the new lower price (P₁) but not the higher price (P₀), and are measured as the difference between Q₁ and Q₀. Their benefit is the triangle formed by on the left by the line extending vertically upwards from Q₀, on the right by the demand line, and on the bottom by the line extending horizontally to the right from P₁.

Rule of one-half

The rule of one-half estimates the change in consumers' surplus for small changes in supply with a constant demand curve. Following the figure above,

where:

• CS = Consumers' Surplus
• Q₀ and Q₁ are the quantity demanded before and after a change in supply
• P₀ and P₁ are the prices before and after a change in supply

Comparison to profit

In terms of supply and demand, consumer's surplus is the analog to profit (or producer's surplus) (which is the difference between price and cost). The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Profit is a positive return made on an investment by an individual or by business operations. ... Profit, from Latin meaning to make progress, is defined in two different ways. ...

History

The idea of consumer's surplus was due to Jules Dupuit and extended by Alfred Marshall. Jules Dupuit (18 May 1804 - 5 September 1866) was a French civil engineer and economist. ... Alfred Marshall Alfred Marshall (July 26, 1842–July 13, 1924), born in Bermondsey, London, England, became one of the most influential economists of his time. ...

See also

• economic surplus
• induced demand
• utility
• welfare economics
• Price discrimination