In this graphic representation, the price is displayed on the y-axis of the curve, the demand quantity is shown on the x-axis, and a horizontal line depicts the actual value of an item.Ĭonsumer surplus is shown above the horizontal line of the actual product price and below the demand curve. To calculate consumer surplus, economists utilize the demand curve. The seller knows that people are willing to pay more, so they turn the consumer surplus into producer surplus.Īn example of producer surplus would be for the travel agent to sell the above-mentioned holiday for the full price of $450, thereby taking the additional $200 that was originally the consumer’s. When a holiday increases in price because the seller knows that there is a demand and people are willing to pay more, then the seller is turning consumer surplus to their advantage. This is one of the reasons why holiday bookings will change in price in high season and low season, despite the holiday being the same. Prices are elastic, however, and so a producer can change prices in accordance with demand. This leaves them with a consumer surplus of $200. That is to say, they pay less money than they would expect or be happy to pay for a product, thereby leaving them with a surplus of cash and satisfaction after completing their purchase.Īn example of consumer surplus would be if an individual would be happy to spend $450 on a holiday, but they find it only costs $250. Read this article to learn about consumer surplus and when you should convert consumer surplus into producer surplus.Ĭonsumer surplus, or buyer’s surplus, refers to the market condition whereby the consumer ends up with a surplus after purchasing a product. Within this, there are two factors to consider: consumer surplus and producer surplus.īy using consumer surplus to your advantage, you can ensure customer loyalty and your own business profit margin. If you are looking to ensure your business’ success, then it is of paramount importance that you understand these concepts. Supply and demand are the main drivers behind any market. On the other side of the coin, if a business is to stay afloat, it will need to ensure a healthy profit margin. When customers feel they are getting a good deal, they are more likely to keep buying from a store.
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