Consumer Surplus

Black Friday is coming up soon. Maybe many people have already chosen what to buy during Black Friday. Starting from Black Friday, the holiday shopping season starts, and people search for deals to purchase things at a more affordable price. The holiday shopping season is related to consumer surplus and producer surplus.

In this article, we are going to learn about consumer surplus. What is the consumer surplus? Consumer surplus is the difference between the price that consumers pay and that they are willing to pay. For example, you plan to buy a bottle of orange juice at $2.50, and you go to a store to buy it. As you enter the store, you find out that the price of orange juice is $1.50. At this point, you are purchasing a bottle of orange juice $1 cheaper than you expected. In this example, $1 is consumer surplus. Now that we understood consumer surplus let’s learn how to calculate a consumer surplus using a formula.

                                    Consumer Surplus Formula = ∫ [p(x)-P]dx  [o,X]

By using the formula, you will be able to calculate the consumer surplus. p(x) is the price that a person is willing to pay for an item, and P is the actual price that the person is paying for.

Let’s try an example by using this formula. We now own an orange juice company and sold 200 bottles of orange juice last week. We are trying to find the consumer surplus of 200 bottles of orange juice that we sold last week. The demand for an orange juice, in dollars, is p = 500 – 0.1x – (0.001)x^2. At this point, we can plug 200 instead of x which equals to P = 500 – 0.1(200) – (0.001)(200)^2 = 440. This means that we have sold a bottle of orange juice at $440. I know it sounds ridiculous, but let’s continue with our calculation. From what we have so far, we can plug the equation into the formula because we found p(x) and P. This equals to

After the calculation, we get $7333.33 of consumer surplus, which means that we could have earned $7333.33 more by selling the orange juice at a higher price. I hope this topic was enjoyable for everyone. It is always interesting to see the mathematics behind economics.