Consumer Surplus

Consumer surplus ($CS$) measures the benefit consumers get when they buy a good for less than they’d be willing to pay. Graphically, it’s the area below the demand curve and above the market price, up to the equilibrium quantity. The demand curve represents willingness to pay; the price is what consumers actually pay. The difference is their “bonus.”

Imagine 5 buyers willing to pay 10 dollars, 8 dollars, 6 dollars, 4 dollars, and 2 dollars for a widget. If the market price is 4 dollars, the first three buyers purchase and gain surplus of 6 dollars, 4 dollars, and 2 dollars respectively. The fourth buyer is indifferent (zero surplus). Total $CS=6+4+2=12$ dollars. With many consumers and a continuous demand curve, this becomes the area of the triangle below.

Now that you can see the triangle, the math is short. The CS region is a right triangle with base $Q^{\ast }$ (the quantity sold) and height $P_{\max }-P^{\ast }$ (the distance from the highest willingness to pay down to the market price). Area of a triangle = $\frac{1}{2}\times$ base $\times$ height.