Consumer surplus is an economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service, relative to its market price. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.
For instance, if you head to the mall prepared to spend $100 on a pair of shoes, but find them on sale for $75, you have a consumer surplus of $25.
In 1901, when J. P. Morgan was negotiating with Andrew Carnegie for the purchase of Carnegie Steel, Morgan asked Carnegie to name his price. Carnegie asked for $480 million, and Morgan immediately accepted. Carnegie later said that he should have asked for $580 million, and Morgan allegedly replied, “If you had, I’d have paid it.”
Collected
The extra $100 million that J. P. Morgan did not pay to Andrew Carnegie is the essence of consumer surplus: the amount a consumer is willing to pay for something, over what is actually paid.
Note that consumer surplus is not a tangible surplus – it doesn’t create extra money in your bank account. Rather, consumer surplus is a measure of the good feeling you have from getting a better deal than anticipated. That feeling is important to economists because a high level of consumer surplus throughout the economy may indicate higher consumer spending, and thus a boost to the economy.
