Surplus

A common, class act meal for all you college folks is Ramen Noodles. Perfect late night snack for a great price, but it is important to understand how consumers and producers both benefit from these delicious noodles financially. 

Consumer surplus explained

Let's say that the current price for a 12 pack of ramen is $10, but your roommates are so obsessed with it (and feel it's such a good deal) that they're are willing to pay up to $14 for that same 12 pack. Remember: different college students have a variance in their willingness to pay!

Willingness to pay is the maximum price a consumer is willing to pay for a good or service.

Since your roommates are willing to pay above the market price for the 12 pack of ramen, they're getting the good at a surplus (a.k.a. cheaper than they were willing to pay).

This is referred to as consumer surplus!

Consumer surplus occurs when a consumer's willingness to pay for a good is higher than the price they have to pay.

On an individual consumer level

The following formula enables us to calculate consumer surplus for a given consumer...

Consumer Surplus = Willingness to pay - Price paid

...and in the case of our roommates, their Willingness to pay is $14...

Consumer Surplus = $14 - Price paid

...but they're only paying $10...

Consumer Surplus = $14 - $10

...therefore, they get a surplus of $4 from the transaction!

Consumer Surplus = $14 - $10 = $4

On a market level

This graph represents the market for Ramen Noodles. Notice how currently, the equilibrium price is $10 (a.k.a. where supply meets demand).

This matches what we said before:

"Let's say that the current price for a 12 pack of ramen is $10, but your roommates are so obsessed with it (and feel it's such a good deal) that they're are willing to pay up to $14 for that same 12 pack."

At a willingness to pay of $14, your roommates were getting a $4 surplus on an individual consumer scale...

...there is a much larger group of all other consumers getting ramen at a surplus! The red triangle below distinguishes that area:

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