UNIMAGINABLE AFFLUENCE:
The Wonder of Consumer Surplus: Is the Gross Domestic Product (GDP) of a country a good measure of economic wellbeing? No, it’s not (David R. Henderson, 10/08/26, Defining Ideas)
And what exactly is consumer surplus? The idea itself is straightforward. The consumer surplus that you get when you buy an item is the maximum amount you would have been willing to pay for the item minus what you actually pay. So, for example, if you would have been willing to pay $50 for a shirt, but actually pay $30, your consumer surplus on that purchase is $20. Another way of saying that is that the consumer surplus is a measure of the consumer’s gain from a particular trade.
Why consumer surplus matters
One of the hardest ideas for non-economists to accept is that both sides gain from trade. The good news is that when I gave examples in class, most students got the point quickly.
Indeed, one of my students gave an example that I hadn’t previously considered but that I have since used in speeches to illustrate the concept of consumer surplus. It goes like this: You go to a store and find a shirt with a price tag of $50. You try it on and decide you like it. You go to the cash register to pay. The salesperson points out something you hadn’t noticed: the shirt is on sale for 40 percent off and so the price is actually $30. My student pointed out that a minimum estimate of your consumer surplus is $20 because you would have been willing to pay $50 but instead paid only $30. Of course, that’s a minimum estimate because you probably would have been willing to pay at least somewhat more than $50. How do we know? Because you probably weren’t indifferent between buying the shirt at $50 or keeping your money.
Once you understand and really appreciate consumer surplus, you can start looking around and appreciating what you have.
