Consumer Surplus Formula

'Savings' received by the consumers

How to calculate Consumer Surplus

Consumer surplus is an economic measurement to calculate the excess consumers spend between what they are actually willing to pay for a good or service versus its market price. The formula is based from an economic theory of marginal utility. This theory explains that spending behavior varies with the preferences of individuals. Since different people are willing to spend differently on a given good or service, a surplus is created. It is used across a wide range of corporate finance careers.

Consumer Surplus formula

Here is the formula for consumer surplus:

Consumer Surplus = Maximum Price Willing – Actual Price
(For one customer)

In Practice

A shopper is determined to buy a $1,000 laptop. As he skims through various electronics stores, he finds one for $600 that meets all his needs, saving $400. The $400 is his consumer surplus, which he can further spend on other needs.​

Consumer Surplus at a Larger Scale

Demand curves are highly valuable in measuring consumer surplus in terms of the market as a whole. A demand curve on a demand-supply graph depicts the relationship between the price of a product, and the quantity of the product demanded at that price. Due to the law of diminishing marginal utility, the demand curve is downward sloping. The shaded part in the illustrated graph presented below represents the consumer surplus.

Extended Formula

Consumer Surplus = Qd x ΔP

Qd = Quantity demanded at equilibrium, where demand and supply is equal

ΔP = Pmax – Pd

Pmax = Price the buyer is willing to pay

Pd = Price at equilibrium, where demand and supply is equal

Practical applications

In a theoretical market for bottled water, a customer is willing to pay $10 for the bottled water, which is the highest amongst other customers. Most customers are only willing to pay $5, which is coincidentally the price that is set when demand meets supply exactly. At $5, 20 bottles are supplied, and consumer surplus is $100. This means that, shared amongst the customers who bought the 20 bottles of water, there is $100 in savings that can go towards other purchases.