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Total consumer surplus as area

AP.MICRO:
MKT‑4 (EU)
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MKT‑4.A (LO)
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MKT‑4.A.4 (EK)
Consumer surplus is calculated by finding the difference between the amount a consumer is willing to pay for a product and the actual price they pay. To find the total consumer surplus, you sum up these differences for all units sold. In some cases this can be simplified to finding the area between the demand curve and the price line. Created by Sal Khan.

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  • blobby green style avatar for user emil2705
    How do firms figure out consumer surplus? Wouldn't it take one massive market study to figure out how much people were willing to spend for a product?
    (32 votes)
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    • leaf green style avatar for user Karl Melrose
      This is an incredibly complex process with lots of moving parts that might happen in lots of different ways depending on whether there is an existing product or not. In general, companies don't set out to find out the consumer surplus directly, they generally set out to find out what price they could charge for a particular product in a particular market and what volume they could sell, they then balance that against their cost is to deliver that product - they generally call it a pricing, market or feasibility study. The model they construct based on the research to show them the price/volume trade off will also be a consumer surplus model but they're most likely not thinking about it like that.
      (41 votes)
  • leaf green style avatar for user hlinee
    Would firms try to minimize consumer surplus in order to maximize profits? Are the two inversely related, ie would more consumer surplus mean less profits?
    (5 votes)
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    • leaf green style avatar for user PetoG
      Regarding surplus and profit: There is no clear relation there. Imagine you sell phones and you can either sell one a week for 100, or 10 a week for 90. Let's say for simplicity that for any price between 90 and 100 you are still able to sell only 1 phone. So, if you were selling for 100, your total surplus would be zero, but if you are selling for 90, your total surplus is 10. But what is your profit? Well, that depends on your costs. If your costs are say 50 per phone, then if you sold one for 100 you would earn 50 a week, but if you sold 10 for 90, your profit would be 400/week.

      Now if your costs are 89/phone, then by selling 1 for 100 you earn 11, bur if you sold 10 for 90 you earn only 10, so now a different option is more profitable, but the surplus situation did not change. If your costs are above 90 the change is even more obvious.
      (25 votes)
  • blobby green style avatar for user Ashon Randall
    If you had applied this method to the previous video, the total consumer surplus would have been 80 instead of 60. It seems you're neglecting to draw in that little right triangle that's between the top of the rectangle (drawn arount on this video) and the demand curve. Which meathod is correct? Because this seems more like an estimation.
    (4 votes)
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    • blobby green style avatar for user Jon Trygve Hegnar
      That is because the method in this video is used for bigger markets (since almost no markets are as small as 1, 2 or 3 consumers). In the bigger markets, it is therefore easier to calculate a consumer surplus this way without caring about the "space" between 0 and 1 orange sold, since that space plays such a small part in the bigger picture.
      (6 votes)
  • leaf green style avatar for user Yustyna Klish
    Could you use calculus to find the quantity of oranges sold to get the maximum profit?
    (5 votes)
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  • leaf green style avatar for user adrien.shen
    What are some ways firms use to reduce consumer surplus and maximize profits by using price discrimination? Some ways I thought of; by offering optional coupons or rewards programs for those wanting to pay less, senior or student discounts, bids and auctions and then offering second chances for the losing bids, by never disclosing a fixed price tag and instead giving qoutes based on each individual customer, waiting for customer offer and then adjusting price base on that. Are these all tactics to maximize profits, what are some other ways of price discrimination?
    (3 votes)
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    • blobby green style avatar for user david.ash.01
      All the methods you mention are tactics of price discrimination which increases profits through minimizing consumer surplus. There are some types of industries that do a very good job at this. For example, airlines change ticket prices all the time based on who they think is buying tickets 3 months in advance (families travelling) vs. 3 days in advance (businessmen who are willing to pay much more).
      (6 votes)
  • male robot donald style avatar for user Lohit Deva
    What would be the consumer surplus for a person whose marginal benefit would be $1 for 100 lbs. of oranges?
    (2 votes)
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  • male robot donald style avatar for user Lohit Deva
    At , Sal says you can look at the curve as a marginal benefit curve or as a demand curve? Are they the same thing or do they have some difference between them? Can someone please explain this to me. Thanks.
    (1 vote)
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  • blobby green style avatar for user yusufthestudent
    where did you get 3.30 and 1.30?
    (2 votes)
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    • duskpin ultimate style avatar for user Hilda
      Like this: The person who bought the 100th pound of oranges would have been willing to pay $3.30 for them. However, the price was $2. Their consumer surplus is what they were willing to pay minus the price, or $3.30 - $2, which is $1.30.
      Hoped that helped!
      (2 votes)
  • marcimus pink style avatar for user I.h.kocadag
    At , you say: 1/2 x 300 x 2

    Where did you get the 1/2 from?

    Thank you very much and I like your videos
    (2 votes)
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  • leafers seedling style avatar for user Kristine Morales
    Conceptually, what is "Total Surplus" in non-mathematical terms?
    (1 vote)
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    • starky ultimate style avatar for user Geoff Ball
      I think it's easier to understand—even conceptually—by breaking it into consumer surplus and producer surplus.

      Consumer surplus is the difference between what consumers were willing to pay (represented by the demand curve) and what they actually paid (represented by the price). This consumer surplus is the area—usually a triangle—between the demand curve, price, and the y-axis.

      Producer surplus is the difference between what producers were willing to accept (represented by the supply curve) and what they actually got (represented by the price). This producer surplus is the area—usually a triangle—between the supply curve, the price, and the y-axis.

      Total surplus is simply the sum of consumer surplus and producer surplus.

      When you introduce externalities things get a bit messier, but hopefully this explanation helps you understand it conceptually.
      (2 votes)

Video transcript

Let's say you run an orange stand. And this right here, you could view this as either the demand curve for your orange stand or your marginal benefit curve, or really you could call it the willingness to pay, the first 100 pounds of oranges. Or that very 100th pound, someone would be willing to pay $3 per pound. But then the 101st pound would be a little bit less than that. So that's the willingness to pay, or the marginal benefit of that incremental pound. But let's say you decide to set the price at $2, and you are able to sell 300 oranges in that week. What I want to think about is, what is the total consumer surplus that your consumers got? And the way to think about consumer surplus is, how much benefit did they get above and beyond what they paid? So for example, the person who bought-- let's just think about the exact 100th pound. The 100th pound, they paid $2. They paid $2, but their benefit looks like it was, I don't know, $3.30. But they only paid $2. So their benefit on that one pound, their benefit, or I should say their consumer surplus, is going to be $3.30 minus a $2.30. So that person who bought that 100th-- not all the 100 pounds, just that 100th pound-- got a consumer surplus of $3.30 minus $2, which is a $1.30 consumer surplus. So if you wanted to figure out the entire consumer surplus, well, you just have to do it for all of the pounds. So that was 100th pound. So essentially, you could view this as the area of this little thing right over here. And let me zoom in, just to make sure you understand what's going on. That thing that I just drew, if we zoom in, will look something like this. It was one pound wide. And this right over here was $2. And then we had our marginal benefit curve, or our demand curve, sloping down like that. And this point right over here was $3.30. And so to figure out the consumer surplus for that pound we said, OK, for that pound they were willing to pay $3.30. The benefit to them was $3.30. But they only had to pay $2. So the height of this right over here was $1.30. And so the consumer surplus is $1.30 per pound times one pound. And so that's where we got the $1.30 consumer surplus. Now, we could do that for every one of the pounds. So we could do that for the 101st pound. Let me get a different color. The 101st pound, we would do it like that. Then the 102nd pound, we would do it like that. 103rd pound like that. We'd do it for the 99th pound like that. And so you could imagine if we wanted to find the total consumer surplus, what are we doing? Well, we're essentially just finding the area between our demand curve and this line where the price is equal to 2. So we're just going to sum up this area. And if you're familiar with calculus, you might know that you can actually make these things arbitrarily small. You don't have to take a one pound wide rectangle. You get a half a pound wide rectangle, or a quarter pound wide rectangle. Then you'll just have more rectangles. It doesn't matter so much if you have a linear demand curve, but if you had a non-linear demand curve then it would matter. You'd want to get smaller and smaller and smaller, or thinner and thinner and thinner rectangles, so you could get better and better approximations for the consumer surplus. But needless to say, what you're really doing-- especially if you get unbelievably thin rectangles, and you have an unbelievably high number of them-- you're really just estimating the area under the demand curve and above the price equals $2. And so if you want to know this consumer surplus-- and I really want you to understand why this was. I mean, just think about it for each pound. It was just how much more value that pound, whoever bought that pound, how much more value do they get relative to what they paid. And we're just summing that up across all of the pounds. So to really figure out the total consumer surplus, we just have to find this area of this blue area. And that's just finding the area of a triangle. So this right over here, you have a base of 300. This length right over here is 300 pounds. And then our height over here. And we can just use this as the area of a triangle, because this is a simple linear demand curve. We would actually have to use a little bit of calculus if this was a non-linear curve. But the height here is 2. So our area, the area between the demand curve and our price equals 2, is equal to 1/2 times base times height. 1/2 times the base, which is 300 pounds, times the height, which is $2 per pound. The pounds cancel out. 1/2 times 2 is 1, times 300 is 300. So we get 300. And all we're left with is dollars. So the total consumer surplus in this case is $300. And it really is just the area between the demand curve and this price equals 2 line right over there.