Definition of Consumer Surplus

Readers Question: what is meant by consumer surplus? Can firms reduce or eliminate consumer surplus?

Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay. It is the area between the equilibrium price and the demand curve

For example, if you would pay 76p for a cup of tea, but can buy it for 50p – your consumer surplus is 26p

Diagram of Consumer Surplus

Can Firms Reduce Consumer Surplus?

1. Firms can reduce consumer surplus if they have market power. – This enables them to raise prices above the competitive equilibrium.
2. In monopoly a firm will maximise profits by reducing consumer surplus. See monopoly diagram
3. Another way to reduce consumer surplus is to engage in price discrimination. – Charging different prices to different groups of consumers. Those with inelastic demand will see their consumer surplus reduced. More on Price discrimination
4. To gain market power, a firm could advertise to create brand loyalty, this will make demand more inelastic

Consumer and Produce Surplus