What is a consumer surplus in economics?

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In economics, a consumer surplus represents the difference between what a customer is willing to pay for a product and the actual price of the product itself. Consumer surplus is based on what is called the law of diminishing marginal utility.

In economics, marginal utility refers to the enjoyment or pleasure a customer gets from consuming one more unit of a product. So, the highest utility is measured during the consumption of the first unit. As each succeeding unit is consumed, the pleasure the customer receives from the product diminishes. For example, the first slice of pizza a hungry customer consumes is bound to register highly on the utility scale. The customer is hungry, and the savory offering is thoroughly satisfying. On the second slice, the customer is still pretty happy. By the tenth slice, though, he may well be groaning in pain.

The law of diminishing utility states that consumption of each succeeding unit of a product leads to diminished satisfaction. Similarly, consumer surplus diminishes with increased consumption. For example, the hungry customer above may have been willing to pay $10 for the first slice of pizza (let's say it's the only pizza he can find within 50 miles). By the time he gets to thinking about his eleventh slice, he may not feel wlling to pay anything.

To measure consumer surplus, remember that it constitutes the difference between what a customer is willing to spend and the market price of the product in question. Our hungry customer was perfectly happy to shell out $10 for his first slice of pizza, even though the market price is usually only about $4.00. In this case, his consumer surplus would be $10-$4= $6. The consumer surplus becomes negative when the customer pays more than what he's willing to pay. As the hungry customer begins to feel fuller, he likely will not be willing to pay as high of a price for a slice of pizza. By his tenth slice, the customer's consumer surplus is probably a negative value.

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