consumer’s surplus

Definitions

Economics

  • noun
    (written as consumer's surplus)
    the difference between the higher price a consumer might be prepared to pay for a good or service and the lower price he actually pays; it contributes to consumer satisfaction

Health Economics

  • (written as Consumer's Surplus)

    The difference between what a consumer pays for a good or service and the maximum they would pay rather than go without it. In the first figure below showing a demand curve (here linear), it is the shaded area bounded by the demand (marginal valuation) curve, the vertical axis and the horizontal line at P. Under particular assumptions it is the maximum that someone will pay for the right to purchase the good at price P or the minimum they must receive to forgo that privilege. In the second figure, imagine the consumer being constrained to purchase under circumstances where they must reveal the maximum they would pay for a small amount of a good rather than none. This is indicated by the first tall rectangle in the second figure. Then they are asked the maximum they would pay for a second small increment, indicated by the second rectangle, and so on. Now imagine that the increments become increasingly tiny and we consider all such increments up to the marginal valuation that equates to the going price.

    The whole of the area below the demand curve up to that rate of consumption is thus the maximum the individual is willing to pay, the rectangle below the price line is the amount that would actually be paid in a market (price times quantity) and the difference between them is consumer's surplus (shaded in the first figure). Practical estimation of consumer's surplus usually makes the assumption that the relevant section of a demand curve, when one has but two observations, is continuous and linear.

Marketing

  • noun the difference between what a consumer is willing to pay for something and what he or she actually does pay for it
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