Unlocking the Value: Understanding the Consumer Surplus Formula
In a nutshell, consumer surplus can be defined as the quantity of money that a consumer can save as a result of paying the actual price of the consumers’ good rather than the maximum amount of money he or she would be willing to spend for the good or service. It can be calculated using the simple formula:
Consumer Surplus=12×(Maximum Willingness to Pay−Market Price)×Quantity PurchasedConsumer Surplus = 1/2×(MWTP−MP)×QConsumer Surplus = 21×(Maximum Willingness to Pay−Market Price)×Quantity Purchased
By getting to know the concept of consumer surplus we should be able to analyze the welfare situations, price strategies, and the impacts of change in the economy. For someone wanting to understand how to measure and interpret consumer surplus, this is very important whether they are a businessperson, a consumer or a policy analyst.