Using the Demand Curve to Measure Consumer Surplus

Consumer surplus is closely related yo the demand curve for a product. To see how they are related let’s continue our example and consider the demand curve for this rare Elvis Presley album.

We begin by using the willingness to pay of the four possible buyers to find the demand schedule for the album. The table in the demand schedule that corresponds to table. If the price is above $100 the quantity demanded in the market is because no buyer is willing to pay that much. If the price between and the quantity demanded is because only John is willing to pay such a high price. If the price is between and the quantity demanded is because both john and Paul are willing to pay the price. We can continue this analysis for other prices as well. In this way the demand schedule is derived from the willingness to pay of the four possible buyers.

The demand curve that corresponds of this demand schedule. Note the relationship between the height of the demand curve and the buyers willingness to pay. At any quantity the price given by the demand curve shows the willingness to pay of the marginal buyer the buyer who would leave the market first if the price were any higher. At a quantity of for instance the demand curve has a height of the price that Ringo the ( the marginal buyer ) is willing to pay for an album. At a quantity of albums the demand curve has a height of the price that George ( who is now the marginal buyer) is willing to pay.

Because the demand curve reflects buyers’ willingness to pay we can also use it to measure consumer surplus. The demand curve to compute consumer surplus in our example. In the price is ( or slightly above) and the quantity demanded. Note that the area above the price and below the demand curve equals. This amount is exactly the consumer surplus we computed earlier when only album is sold.

Consumer surplus when the price is (or slightly above). In this case the area above the price and below the demand curve equals the total area of the two rectangles John’s consumer surplus at this price is and Paul’s. This area equals a total. Once again this amount is the consumer surplus we computed earlier.

The lesson from this example holds for all demand curves. The area below the demand curve and above the price measures the consumer surplus in a market. The reason is that the height of the demand curve measures the value buyers place on the good as measured by their willingness to pay for it. The difference between this willingness to pay and the market price is each buyer’s consumer surplus. Thus the total area below the demand curve and above the price is the sum of the consumer surplus of all buyers in the market for a good or service.

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