Consumer and Producer Surplus

How Changing Prices Affect Consumer Surplus

Increases and decreases in price lead to a decrease or increase in the consumer surplus respectively.
Consumer surplus changes when prices change. For example, a frost in either Florida or Brazil will drive up the price of orange juice everywhere because a smaller supply of oranges causes there to be less juice in stores for customers to buy. Likewise, more sustainable fishing practices can drive down the price of salmon because of a bigger supply for fishermen to catch. Because consumer surplus is based on the difference between the price consumers are willing to pay and the actual market price, changing the market price will affect the value of consumer surplus.

A Price Increase Affects Consumer Surplus

A price increase causes consumer surplus to decrease.
A price increase impacts consumer surplus, the difference between how much a consumer is willing to pay for something and the actual price of that thing. An increase in price will cause a decrease in consumer surplus.

The impact on an individual's consumer surplus impacts the total consumer surplus (the sum of individual consumer surpluses). For example, suppose the national average price for a cup of coffee is $2.00 and the total consumer surplus adds up to $3.50. If the national average price rises to $2.38, the total consumer surplus must be recalculated. Because the new price is higher, the new total consumer surplus will be lower than $3.50.

Consumer Surplus When the Price of a Cup of Coffee Increases to $2.38
Potential Customer Willingness to Pay Old Market Price Individual Consumer Surplus at Old Price New Market Price New Individual Consumer Surplus
Andrea $4.00 $2.00 $2.00 $2.38 $1.62
Brett $3.00 $2.00 $1.00 $2.38 $0.62
Christy $2.50 $2.00 $0.50 $2.38 $0.12
Deb $1.99 - - - -
Eddie $1.00 - - - -
Frank $0.10 - - - -
TOTAL Consumer Surplus (old price) = $3.50 TOTAL Consumer Surplus (new price) = $2.36

When the price of coffee increases, the consumer surplus decreases at both the individual and total levels.

A Price Increase Affects Consumer Surplus

Each consumer's willingness to pay has not changed—each consumer still places the same value on a cup of coffee as before. The higher price has affected the consumer surplus, however. Although the price has not increased enough to cause anyone to leave the market, they each get less of a gain from trade. As a result, the total consumer surplus has fallen from $3.50 at the old price to $2.36 at the new, higher price. The total consumer surplus has decreased by $1.14.

The effect of this lost benefit may be felt somewhere else in the economy. Incomes have not increased, so the additional amount spent on coffee has to be made up for somewhere in the consumers' budgets. They have less to spend elsewhere because they are paying a little more in the coffee shop. In addition, because they are each feeling a little less well-off because of their smaller consumer surplus, any of them could potentially cut back spending.

A Price Decrease Affects Consumer Surplus

A price decrease causes an increase in consumer surplus.
If the market price of a cup of coffee falls, the consumer surplus rises. A price decrease leads to increased consumer surplus. For example, if the national average price of a cup of coffee falls from $2.00 to $1.00, the consumer surplus will increase.
Consumer Surplus When the Price of a Cup of Coffee Decreases to $1.00
Potential Customer Willingness to Pay Old Market Price Individual Consumer Surplus at Old Price New Market Price New Individual Consumer Surplus
Andrea $4.00 $2.00 $2.00 $1.00 $3.00
Brett $3.00 $2.00 $1.00 $1.00 $2.00
Christy $2.50 $2.00 $0.50 $1.00 $1.50
Deb $1.99 - - $1.00 $0.99
Eddie $1.00 - - $1.00 $0
Frank $0.10 - - - -
TOTAL Consumer Surplus (old price) = $3.50 TOTAL Consumer Surplus (new price) = $7.49

When the price of coffee decreases, the consumer surplus increases at both the individual and total levels, and new consumers enter the market.

A Price Decrease Affects Consumer Surplus

As with price increases, each consumer's willingness to pay and the value each consumer places on a cup of coffee has not changed. However, the lower price has affected their consumer surplus. Not only have the original three consumers seen their consumer surplus increase, two additional customers, Deb and Eddie, decide to buy a cup of coffee because the market price has fallen at least to the amount that they are willing to pay. In Deb's case the price of a coffee is lower than she values it, so she gets a consumer surplus of $0.99. For Eddie, the market price is now equal to his willingness to pay. While he buys a coffee because he feels the price is worth it, he also does not get any additional consumer surplus, because the price he paid is exactly equal to the value of coffee for him.

This additional consumer surplus may have an impact on the wider economy. Andrea, Brett, and Christy are spending less on their cup of coffee so they have extra spending money they can use elsewhere. However, Deb and Eddie are both spending money on coffee they were not before, so it is harder to determine what the overall impact will be. Income has not risen. Even though total consumer surplus has increased by $3.99 ($7.49 at the new price minus $3.50 at the old price) due to the price of coffee going down, some of the money spent on coffee will have been reallocated from other potential uses. However, the three established customers are spending less on coffee and may choose to use that money to buy other things.