What is consumer surplus? Why can it be measured as the area under the demand curve...

What is consumer surplus? Why can it be measured as the area under the demand curve and above the price line? Provide an example illustrating the consumer surplus you receive from one of your recent purchases.

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Expert Solution

Consumer surplus refers to the difference between maximum price that consumers are willing to pay for a commodity & the total price actually paid by them, or the equilibrium price. In other words it is the difference between what we would pay & what we have to pay for a commodity.

It can be measured as the area under the demand curve and above the price line because demand curve itself reflects the utility consumers gain from buying a commodity & the price paid is the cost of getting that utility. So difference between Utility (benefit) & price (cost) is the consumer surplus. Any increase in price will lead to reduction in consumer surplus, while a decrease in price will lead to an increase in consumer surplus.

Recently I wanted to purchase a book for which I was willing to pay $100 & when I actually went to the book store I purchased it for $80, thus I gained a surplus of $20 (100-80).

Rahul Sunny answered 1 year ago

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