How to Calculate Consumer Surplus

If you are inspecting an economics textbook, looking up economics ideas on the Internet, or otherwise involved in researching modern economics, you may need to understand what is involved in a consumer surplus. The consumer surplus is something that may not be commonly used in the average household to determine worth, but it is something that many schools teach as an element of retail economics or some other type of economics. If you need to figure out what consumer surplus means and how it relates to everyday commerce, here are some of the basic steps to get you more knowledgeable on this and similar economic terms.

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Steps

    1
    Understand how the consumer surplus is set up. Consumer surplus is generally shown on a graph with an X axis and a Y axis.
        Figure out the X and Y axes of the consumer surplus graph. On the vertical axis, the consumer surplus chart generally includes the label "price," while on the horizontal axis, the label is something like "quantity demanded."
    2
    Define consumer surplus. Just looking at the chart will usually not give the reader an accurate picture of what consumer surplus is. A formal definition may help. Consumer surplus is broadly defined as the difference between an item's "total value" or "total value received" to consumers, and the actual price that they pay for it.
    3
    Learn the meaning of "total value received." To many beginners, this phrase is extremely enigmatic or cryptic, and not ultimately very useful. The reason is that total value received is based on many different factors and is not a very technical valuation.
        Keep in mind that the total value received is defined as the highest price that the customer would have paid based on many different factors. Experts include items like "wealth and status," "discretionary spending" or other similar elements as factors in total value received.
    4
    Consider the quantity that is described on the horizontal axis. The quantity affects the value in that customers can often get discounts for buying in bulk. Otherwise, this is simply a reflection of a greater retail price for a greater quantity of goods.
    5
    Contemplate the use of an actual price "strike line" on the graph. Most consumer surplus graphs will have a horizontal line drawn through them that represents the price that a customer ultimately paid for the goods. It's important to understand the relationship between this horizontal line, the part of the graph below it and the part of the graph above it.
    6
    Evaluate the shaded area above the line. This area represents the consumer surplus. It is a reflection of savings from a price that customers would have paid, had they been forced to make this higher payment which has also been called a reservation payment.