How to Calculate Consumer Surplus

Understand the law of demand. Most people have heard of “supply and demand” when the term is used to refer to the mysterious forces that run the market economy. However, many people still do not fully understand their meaning. “Demand” is the desire for a good or service in the market. In general, all else being equal, the demand for a product decreases as the price increases. ^[2]

• For example, suppose a company is about to launch a new model of television. The higher the price, the less the company expects to sell. That’s because consumers have a limited amount of money to spend and when they pay more for a TV, they may have to spend less on other things, products that can provide better benefits. groceries, gasoline, securities, etc.).

Understand the law of supply. Conversely, the law of supply dictates that goods and services that are demanded at a high price will be in great supply. In particular, sellers want to generate maximum revenue by selling many expensive products and therefore, if a certain good or service is highly profitable, they will rush to produce that good or service. ^[3]

• For example, let’s say that just before March 8, the commission becomes very expensive. Given this fact, farmers capable of growing roses will put all their resources into the above activity, creating the maximum amount of roses they can produce to take advantage of the high price situation.

Understand how supply and demand are plotted. The two-dimensional x/y coordinate system is a way of representing the relationship between supply and demand that is very commonly used by economists. Usually, in this case, the x-axis is used for Q – quantity, the quantity of the good in the market, and the y-axis is used for P – price, the price of the good. Demand is represented by a curve sloping down from top, left to bottom, right, and supply is represented by a curve sloping up from bottom, left to top, right. ^[4]

• The intersection of the supply and demand curves is the point at which the market is in equilibrium – the point at which the quantity of goods supplied by producers is roughly equal to the quantity of goods and services demanded by consumers. . ^[5]

Understanding marginal utility . Marginal utility is the increase in satisfaction a consumer receives from consuming one more unit of a good or service. In the general case, the marginal utility of a good or service obeys the law of diminishing returns, that is, the benefit from each additional unit purchased becomes less and less. Eventually, the marginal utility of the good or service will decrease to the point where it is no longer “worth buying” more. ^[6]

• For example, suppose a person is very hungry. She went to the store and ordered a sandwich worth 20,000 VND. After eating, she was still a bit hungry, so she ordered another one for 20,000 VND. The marginal utility of the second loaf will be slightly lower than that of the first because it provides less satisfaction in reducing hunger. This consumer decided not to buy the third loaf because she was full and therefore, it would not be of any benefit to her.

Understand consumer surplus. The broad definition of consumer surplus is the difference between a consumer’s “total value” or “total value received” for an item and the price they actually pay for it. That is, if a consumer pays for a product less than what it gives them, the consumer surplus represents the person’s “savings”. ^[7]

• As a simple example, consider a consumer in the used car market. That person spent 200 million VND to buy a car. If the person buys the desired car for 120 million, we can say that the person has a consumer surplus of 80 million dong. In other words, the car is worth $200 million to that person but in the end, this consumer gets the car and an 80 million surplus for other discretionary consumption.