The demand equation is a downward sloping graph used to represent consumers' willingness to pay for a good. The consumer surplus of a market is the difference between what consumers are willing to pay for a good and what they are actually paying for a good. When consumers are able to buy units of a good for a price lower than what they would have been willing to pay, their savings are considered "consumer surplus." Determining the consumer surplus in a market is a simple calculation using the demand equation.
Pick a market price for the consumer surplus calculation. This can be the set price in a market or an example price that you want to test. You need a given market price for this calculation.
Calculate the total units of the good purchased using this price according to your demand equation. This calculates the maximum units of a good that consumers are willing to pay at the current market price. For example, if your demand equation is P = 8 - 2Q and P = $2, calculate Q. 2 = 8 - 2Q 2Q = 8 - 2 = 6 Q = 6/2 = 3 Consumers will purchase three units of the good if its price is $2.
Calculate the y-intercept of your demand equation. This is the price when quantity equals zero on your demand equation and is the maximum price consumers are willing to pay for the good. If your demand equation is P = 8 - 2Q, what is the y-intercept price? P = 8 - 2Q P = 8 - 0 = $8
Form a triangle with the maximum quantity desired as your triangle base, the maximum price limit as the triangle height and the demand equation as the triangle hypotenuse.
Calculate the area of your triangle using the formula 1/2 x height x base. This calculates the total consumer surplus from your equation. Using the maximum price of $8 as the height and the maximum units purchased of 3 as the base, the consumer surplus in this market would be: 1/2 x 8 x 3 = $12 The consumers receive a surplus of $12 from participating in this market.
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