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In Microeconomics producer surplus is equivalent to profits minus fixed costs.

However getting a tangible definition of consumer surplus has been difficult for me to ponder.

What is the practical use of knowing consumer surplus and what does it tell us?

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    $\begingroup$ Producer's surplus is not equivalent to profits, the difference being fixed costs. $\endgroup$ – Giskard Dec 26 '17 at 23:32
  • $\begingroup$ @denesp mind sending a link to backup your claim. Wikipedia differs: Producer surplus or producers' surplus is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for; this is roughly equal to profit (since producers are not normally willing to sell at a loss, and are normally indifferent to selling at a breakeven price). en.wikipedia.org/wiki/Economic_surplus $\endgroup$ – EconJohn♦ Dec 26 '17 at 23:42
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    $\begingroup$ EconJohn your qoute is a good enough backup for me. The supply curve is the part of the marginal cost curve that is above the shut down point. The closure point is the quantity at which the average variable cost is minimal and the corresponding average variable cost. As both the MC curve and the AVC curve are independent of fixed costs, so is the supply curve defined by them. The producer's surplus, calculated from this (see your link), will also not include fixed costs, whereas profit does. $\endgroup$ – Giskard Dec 27 '17 at 8:02
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    $\begingroup$ This is spelled out in more detail in intermediate micro books, e.g. Varian. If you write down the integral defined by producers surplus you will see yourself that it comes down to $$ \text{PS} = \int_0^y p - MC(x) \text{d}x = py - VC(y) = py - C(y) + F $$ $\endgroup$ – Giskard Dec 27 '17 at 8:05
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It is better to think of it as a "saving" rather than as a"surplus". Also, it is better understood if we imagine heterogeneous consumers for whom a threshold price exists, a "maximum willingness to pay". Then at a given price level, some consumers are willing to buy the product and are expressing their demand for the product, while others are out of the market, because the price is still above their maximum willingness to pay.

If the price falls more towards the equilibrium, they enter the market. But the ones already in the market would be willing to buy the good at a higher price. With the added consumers/higher output, they buy the good in a lower price than their maximum willingness to pay, and in that sense, they "save".

Imagine that the market demand function is build gradually not by the same persons increasing their quantity demanded, but by the addition of new consumers (this is easier imagined if we think of durable goods of which most consumers will usually buy just one unit or not at all).

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  • $\begingroup$ So consumer surplus can be viewed as saved income from possible purchase at a higher price? $\endgroup$ – EconJohn♦ Dec 26 '17 at 23:07
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    $\begingroup$ @EconJohn Yes, that's the interpretation I am advancing in this post. $\endgroup$ – Alecos Papadopoulos Dec 27 '17 at 1:31
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You can think of consumer surplus as exactly analogous to the consumer’s profits. Let’s think of a setting with only one consumer and one firm, both price takers, and standard demand and supply (i.e. downward- and upward-sloping) curves.

Observe that profits capture how much more the firm would have been willing to incur in costs in order to produce the good (at the equilibrium price and quantity). In the same way, consumer surplus captures how much more the consumer would be willing to pay to purchase the goods from the firm.

Put differently, suppose I charged the consumer some amount in exchange for the opportunity to trade with the firm. The consumer surplus captures the largest amount I could charge this consumer without deterring them from accepting the opportunity to trade.

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Consumer surplus is the difference between what the consumer would be willing to pay and what the consumer actually paid. For example, if the consumer values the product at \$80 but the product actually sells for \$50, then $\$80 - \$50$ or \$30 is the consumer surplus.

It would be the amount left in the consumers' pockets if the consumers started with the price that they would be willing to pay.

It can also be considered the surplus in utility that the consumer receives (as stated here). The consumer would have been willing to pay \$80 in the example. Because the consumer actually paid \$50, the consumer receives \$30 worth of utility without paying for it.

It is the latter explanation that most likely leads to the name consumer surplus. Even though calling it consumer savings might be a more intuitive way of thinking about it.

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Consumer surplus simply refers to the excess amount left in the hand of a consumer after the purchase of a particular commodity.

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  • $\begingroup$ Welcome. It is not clear what you mean by "excess amount left in the hand of the consumer". Under which criterion it is characterized as "excess"? $\endgroup$ – Alecos Papadopoulos Oct 7 '18 at 2:45

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