Consumer surplus

Consumer surplus is the difference between consumers’ willingness to pay for a good and the amount they actually pay. It measures the net benefit buyers receive from market transactions.

Willingness to pay: The maximum price a buyer is prepared to pay for a good or service. Consumer surplus is calculated by comparing this value with the price actually paid.
Economic surplus: The combined gains from trade accruing to buyers and sellers in an economic exchange. Consumer surplus is the buyer-side component of this broader measure.
Tax incidence: The distribution of a tax burden between buyers and sellers, regardless of who legally pays it. Taxes can raise buyers’ prices and reduce consumer surplus, with the burden depending on market responsiveness.
Consumer surplus and willingness-to-pay measure: A distinction between surplus calculated from demand and welfare valued directly through willingness to pay. The two measures can differ when income effects make demand-based estimates imperfect.
Demand curve: A graph showing the quantity of a good consumers will buy at different prices. Its area above the market price and below demand represents consumer surplus.
Producer surplus: The difference between the price sellers receive and the minimum they would accept for a good. It measures sellers’ gains alongside consumer surplus in assessing trade.
Price ceiling: A legal maximum price that sellers may charge for a good or service. A binding ceiling can lower prices for buyers but also create shortages that limit purchases.
Equivalent variation: The income change at original prices that would produce the same utility change as a price change. It measures a price change’s welfare effect using money and utility rather than demand-curve area.
Market equilibrium: A market condition in which quantity supplied equals quantity demanded at a particular price. Equilibrium determines the price used to calculate buyers’ surplus in a competitive market.
Willingness to accept: The minimum compensation a seller is willing to receive in exchange for a good or service. Comparing buyers’ willingness to pay with sellers’ willingness to accept identifies gains from trade.

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