Introduction

According to our demand curve, at a price of R4, buyers are willing and able to buy 300 pieces of fried chicken. What it also indicates is that for up to 300 pieces, buyers are paying less for a piece of fried chicken than they are actually willing to pay. For instance, at a point such as point B, some buyers are willing to pay R7, but they are only paying R4. They therefore have a surplus of R3 per unit. Similarly, a buyer who is willing to pay say R7,90, which can be indicated as point A, will have a surplus of R3,90 per unit.

By adding up all the consumer surpluses at the different prices, we can derive the total consumer surplus at a market price of R4.

Using this demand curve, total consumer surplus at a market price of R4 can therefore be represented by the triangular (4-8-E) area between the demand curve, which indicates the maximum prices buyers are prepared to pay, and the horizontal line (which indicates the market price of R4), as indicated in the following diagram:

Activity

Which one of the following best describes consumer surplus?





Think again.

The price a consumer is willing to pay is part of the consumer surplus. You however also need to know what the actual price paid is.

Think again.

The cost of producing the unit is not relevant at this stage.

Think again.

The profit that is made is not relevant at this stage.

Correct.

Consumer surplus is the difference between what consumers pay and the value they receive, as measured by the maximum price they are willing to pay.

You are interested in buying a used car and you see one for R80 000 at a second-hand car dealer. You decide that you are not willing to pay R80 000 for it, but only R75 000. The salesman is desperate to sell the car, and after estimating what you are more or less willing to pay, the two of you settle on R73 000.

What is your consumer surplus for this car? R_______

Click to see the answer

Your consumer surplus is R2 000.

It is the difference between what you are willing to pay, which is R75 000, and the amount you actually pay, which is R73 000, which gives you R2 000.

So next time you buy a second-hand car, let the salesman think that the amount you are willing to pay is less than your real willingness to pay.

The following graph shows the market demand for ice cream:

  1. If the market price is R10, what is the consumer surplus per unit for a quantity of 200?
    R_______
  2. If the market price is R10, what is the consumer surplus per unit for a quantity of 100?
    R_______
  3. What area represents the total consumer surplus if the market price is R10?
    ________
  4. What area represents the total consumer surplus if the market price is R15?

    ________

Click to see the answer

a. It is R5.

b. It is R10.

c. It is the area 10-25-R.

d. It is the area 15-25-C