Consumer surplus is an important concept in economics, and it is defined as the difference between the willingness of a consumer to pay for a product and the actual amount that the consumer ends up paying in order to acquire the product.
Consumer surplus can be positive or negative. It will be positive if the market price of a good is less than the price the customer is ready to pay. In contrast, it will be negative if the market price is greater than the customer’s willingness to pay.
The market price is the price of goods that is prevalent in the market. In contrast, the price that the consumer is willing to pay is the price that is determined by the consumer after researching the market.
The price for a product is determined by the company that is producing it. It also depends on the demand and supply of the product.
The consumer surplus formula can be represented as follows:
Consumer surplus = Maximum price buyer is willing to pay – Actual price
The consumer surplus formula for multiple consumers can be expressed as follows:
Consumer Surplus = ½ * Demand quantity at equilibrium * (Maximum price buyer is willing to pay – Market price)
This is also known as the extended consumer surplus formula.
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