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Consumer surplus introduction

AP.MICRO:
MKT‑4 (EU)
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MKT‑4.A (LO)
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MKT‑4.A.4 (EK)
In this video, we introduce the concept of consumer surplus as the difference between marginal benefit and price paid. Created by Sal Khan.

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  • leaf green style avatar for user Stephanie Samson
    Is the $60,000 basically the HIGHEST price the consumer is willing to pay and the $30,000 the price the consumer actually pays?
    (11 votes)
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    • blobby green style avatar for user Emiliano
      60,000 is the price that 1 consumer is willing to pay per day, Only 1. For some reason the price is 30,000 so he ends up paying 30,000; although, there are other costumers willing to pay 30,000 that day for a new car (4 people).
      (14 votes)
  • orange juice squid orange style avatar for user Lew YL
    Is marginal benefit actually the price the consumer willing to pay?
    (3 votes)
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    • aqualine ultimate style avatar for user Roy Wang
      Marginal benefit is exactly what you are willing to pay because you pay the price for the value/benefit/utility you get. Assume you are thirsty and is willing to pay $10 for bottle of water. When you have drunk one bottle but would still like a second bottle of water, you are not willing to pay as much as $10, because you are less thirsty now and would get less value/benefit/utility from one bottle of water.
      The value of one bottle of water decreases the more bottles of water you have, thus decreasing marginal benefit is what we face as well as a downward sloping demand curve.
      (12 votes)
  • blobby green style avatar for user mizan.shohel
    I would really like to know what is the differences between marginal benefit and marginal
    utility. So far I can understand is that marginal benefit is what a consumer is willing to pay, So if I want to pay $1000 for an Iphone and actually the price of the Iphone is then $1500, what would be my marginal benefit? thanks
    (4 votes)
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  • female robot grace style avatar for user Rey #FilmmakerForLife #EstelioVeleth.
    can you have negative consumer surplus? like you buy something that cost more than you wanted to spend on it?
    (4 votes)
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    • leafers ultimate style avatar for user Zach Kirsteins
      The consumer reservation price (i.e. where cost=marginal benefit) is how much you WILL buy it for, i.e. by definition, you won't buy something if it's below your reservation price.

      If you bought an item at price A but wanted it for a lower price B, your reservation price is still greater than or equal to A, because you bought the item.
      (2 votes)
  • blobby green style avatar for user naho3333
    If supply was to increase, would consumer surplus rise or fall?
    (2 votes)
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  • aqualine ultimate style avatar for user Krylov
    Well, as I understood, if I bought iPhone for 1.000$ (is this my marginal benefit???) and now this phone of price is 800$ then consumer surplus is -200$ ? Marginal benefit is current price of product? Or I don't understand something ? Thanks.
    (0 votes)
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  • blobby green style avatar for user Samuel Lee
    Is the consumer surplus the Marginal Benefit-actual market price?
    So potentially, does the 1st consumer have 30k saved?
    (0 votes)
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    • starky ultimate style avatar for user Geoff Ball
      Consider an English auction. There is an item for sale that I am willing to pay no more than $30 for. You are willing to pay no more than $50 for it. Joe is willing to pay no more than $10 for it. Mary is willing to pay no more than $40 for it.

      Each of us has a willingness to pay. That is our marginal benefit—our willingness to pay. Presumably, the item is going to go to you, as you're willing to pay the most. Let's say we all bid up the item until you bid $40. At that point, no one else will go higher—not even Mary, since the next highest bid would be greater than her willingness to pay. If she bought it for $45, the price would exceed the benefit she would receive.

      So let's say you buy it for $40. You were willing to pay $50. Since your marginal benefit exceeded the price you paid by $10, you obtained $10 of consumer surplus. To directly answer your question: yes, consumer surplus is marginal benefit – price.

      Now, did you "save" $10? Not really. You were willing to pay more, but all that means is that you received some consumer surplus—you received more benefit by taking part in the market (and buying the item) than you would have received by staying out of the market (that is, not buying the item and keeping your $40).
      (7 votes)
  • leaf green style avatar for user Juicy
    I have a question regarding the consumer surplus... When Khan calculated consumer surplus, he added the distance between marginal benefit curve and fixed cost of $30,000 and added up for each quantity represented. Why didn't he calculate the triangular curve (y axis, marginal benefit curve, $30,000 fixed cost line) to calculate consumer surplus? What would that triangular curve represent in marginal benefit curve?
    Can someone help me understand please?
    (2 votes)
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  • spunky sam blue style avatar for user Vishnu Gopalakrishnan
    Can the seller try to sell at a higher price for each person after seeing the market psychology for marginal benefits for say a month ?
    (2 votes)
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    • starky sapling style avatar for user muzzzyk
      Theoritecally the seller could do it. For example first say. That I only have 1 piece for sale, so only one buyer would buy it for high price (60) and later sell 2nd piece to the 2nd buyer. This could of course only happen, if there are no other sellers of this product and no substitutes. So one buyer is controlling whole supply. It's called monopoly.
      (1 vote)
  • piceratops seed style avatar for user Brett Hulet
    Is the marginal benefit the same thing or at least similar to the Market Equilibrium?
    (2 votes)
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Video transcript

In the last video, we saw how you can actually view a demand curve as actually a marginal benefit curve. That for any given the quantity of the good you're selling, that that point on the curve is actually showing the marginal benefit for that incremental unit. So this is a marginal benefit for that first unit. This is the marginal benefit for that second unit. And there's multiple ways that you could view this, assuming that we're talking about this new car here. Maybe if you're going to only sell one unit, someone really wants it really bad, the benefit for them, the marginal benefit for that first unit for them, is going to be $60,000. Now, let's say if you want to sell two units, that second unit might be bought by that same person. And they might say, well, I already have one car. The benefit of getting that second one's only $50,000. That's the point at which I am neutral. That's the point at which I'm right on the fence of willing to buy that car. Or it might be another person, another person who's just not as enamored as the first person, who says, OK, for $50,000 I do like that car. And then for the third, the third person there, once again, they're not as enamored as the first two, they would be willing to buy it for $40,000. And what we saw is at some point you could say, look, let's say that we decide that the price ends up being-- for whatever reason-- $30,000. And so when the price is $30,000-- and this is kind of viewing it in the traditional notion of, at a price, what quantity were you selling it. But when you think about that reality, what's actually happening is that this fourth person is right on the fence. Their marginal benefit is exactly $30,000. So in their mind, they're saying, I am giving away $30,000. And in exchange for that I'm getting something that is worth $30,000. So it's kind of like, hey, will you be willing to trade this dollar for a dollar? Well, you probably would be kind of on the fence about that. You're very close to going either way. You feel like it's a good deal if you could get it for maybe a penny less. It's a bad deal if you're getting it for a penny more. So right on the fence, but you're going to just barely get this fourth person to transact at this price. But what we hinted at is if you do have one price for everybody-- in the future we'll talk about not having one price for everybody-- but if you did have one price for everyone, these first units were kind of sold below where they could have been sold. They were sold below their marginal benefit. So remember, we're viewing this same demand curve we're now viewing as a marginal benefit curve. So this first unit right over here, it could have been sold at $60,000. But now, we're selling it for $30,000. So this right over here, this was $30,000. I'll just write 30 for $30,000. The marginal benefit is $30,000 higher than the actual price. The marginal benefit of that unit, the benefit that the market got out of it is $30,000 higher than the price. The marginal benefit for the second unit is $20,000 higher than the price at which the product is being sold. The marginal benefit for this third unit, assuming this is $40,000, is $10,000. Or another way to think about it is, the consumer surplus for this first unit was $30,000. The consumer's got $30,000 more in benefit, marginal benefit for them and value for themselves, than they had to pay for it. Here, the consumer surplus was $20,000. The consumer got $20,000 more in value than that second consumer was willing to pay for it. And here is $10,000. And then this fourth consumer is neutral. The marginal benefit is what they paid for it. And so when you think about this, you can say, well, what's the total consumer surplus here? Let me write this down. What is the total consumer surplus? And another way of thinking about it is, what is the total excess of marginal benefit above and beyond the price paid? So how much surplus marginal benefit did they get, if you take out the price paid? And over here, the total consumer surplus is going to be the $30,000 for that first unit, plus the $20,000 for that second unit, plus the $10,000 for that third unit. And so the total consumer surplus in this scenario when we sold four units at $30,000 is-- And we're assuming we're selling cars here. So we can't sell parts of cars here. We can't sell 1.1 cars. I guess if we're talking about averages, maybe we could. But let's just say we're selling just whole numbers of cars here. The total consumer surplus in this situation was 30 plus 20 plus 10, which is $60,000. Everything's in thousands. So this is $60,000. So in this scenario, in that week, the consumers would get $60,000 more in benefit for them, in perceived benefit for them, than what they actually had to pay for it. And if you think about it, it's a little unideal for the seller, because they were selling something at a lower price than maybe what they could have gotten from at least these first few consumers here. And that was because they, just really based on the model that we have here, they just had to set one price.