How to Calculate Consumer Surplus

Consumer Surplus is defined as the difference between the amount of money consumers are willing and able to pay for a good or service and the amount they actually end up paying at the market price. Calculating consumer surplus follows a simple 4-step process:

1. Drawing the Supply and Demand Curves
To draw our supply and demand curves we first need a supply and demand diagram that shows the quantity on the x-axis and the price on the y-axis. Next, we need a supply and a demand function and find at least two points on each curve. To do that we can plug two random prices into both functions, and solve the resulting equations for quantity supplied (QS ) or quantity demanded (QD ) respectively. Then we can simply plot the results in our supply and demand graph, and draw two straight lines through those points to get the supply and demand curves.

2. Finding the Market Equilibrium
The market equilibrium is located at the intersection of the supply and the demand curve. That’s where supply is equal to demand and the market clears. To find this point, we need to equal the supply and demand functions and solve the resulting equation for p to get the equilibrium price. Then we can plug the equilibrium price back into the demand function and solve for Q to find the equilibrium quantity.

3. Connecting the Price Axis and the Market Equilibrium
The market price is usually not the highest possible price at which a good or service could be sold. That means there are at least some consumers who would be willing to buy the product at a price above the actual market price. These buyers can earn a consumer surplus, equal to their individual willingness to buy minus the market price.
To illustrate this, we can draw a horizontal line between the market price on the y-axis and the market equilibrium. This line divides the area between the supply and demand curves into two triangles. One triangle below the market price and another one above. The area of the upper triangle shows the sum of all individual consumer surpluses, which is equal to the total consumer surplus.

4. Calculating the Area of the Upper Triangle
To calculate the area of our upper triangle, we can use the universal formula to calculate the area of a triangle, which is base * height, divided by two. That means, we pick one side of the triangle as the base, multiply it with its height, and divide the result by two, to get the consumer surplus.

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