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### Course: Microeconomics>Unit 4

Lesson 1: Consumer and producer surplus

# Total consumer surplus as area

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.

## Want to join the conversation?

• 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?
• 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.
• 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?
• 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.
• 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.
• 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.
• Could you use calculus to find the quantity of oranges sold to get the maximum profit?
• Yes, but calculus is much more difficult and more work, better use algebra to work out linear curves. You'll want to use calculus for non linear curves though.
• 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?
• 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).
• where did you get 3.30 and 1.30?
• 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!
• What would be the consumer surplus for a person whose marginal benefit would be \$1 for 100 lbs. of oranges?
• Great question. Well when you say "marginal benefit" I'm assuming you're talking about marginal "utility". So what you're looking at is the satisfaction that the consumer gets from the "next" product, which in this case you're using price to point it on the graph, so the consumer's marginal utility at \$1 is the quantity of 150 lbs. which is at price of \$3.
more on marginal utility :
but if you're looking at the quantity and specifically at 100 lbs., then the marginal utility (satisfaction) is 1.30 as Sal said.
Cheers
• 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)
• same thing. A marginal benefit curve is a demand curve as a marginal cost curve is a supply curve.
• 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
• Conceptually, what is "Total Surplus" in non-mathematical terms?
(1 vote)
• 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.