- Explaining The Concept Of Consumer Surplus (article): Michel Kelly-Gagnon argues that anti-smoking activists overlook smokers’ consumer surplus.
- How Much Would Be Lost if Uber Simply Went Away? (article): Economists have been able to calculate the amount of consumer surplus has been created by Uber. In this article, Tyler Cowen explains just how valuable Uber is to the American consumer.
- What Is Subjective Value? – Learn Liberty (video): Consumer surplus would not exist if value were not subjective. In this video, Professor Don Boudreaux explains subjective value and why it’s so important in to economics.
Daniel Russell: Think about something you bought recently. A book, for instance. You bought it because you wanted the book more than what you had to give up to get the book. Let’s use this blue bar to represent how much you would have given up for the book and this red bar for how much you had to give up for the book. Notice the difference between the two bars. That difference between how much you value what you consume and how much you give up to consume it is known as consumer surplus. Creating consumer surplus is the point of economic activity in the first place.
So, how do producers increase consumer surplus? One way is to improve what people consume and the other way is to reduce what consumers give up. These two changes lower the real price of the book. The real price is not the same as the number on the price tag. That’s the nominal price and it may or may not go down. But any time the gap increases between how much people value what they consume and how much they have to give up to consume it, the real price goes down and consumer surplus goes up.
But what is it that motivates producers to make either of these changes? The answer is competition. Because competition means that producers not only have the hope of profits, they are also threatened with the risk of loss. Let’s start with lowering the cost of production. The printing press dramatically reduced the cost of manufacturing books and that made the book trade more profitable. As more bookmakers started using the printing press, there was more competition, price of books continued to fall, that created consumer surplus, and that’s a win. So, the hope of a reward of profits coupled with the risk of loss from competition gives producers an incentive to do things that will have the side effect of creating consumer surplus. Well, from their perspective, it’s a side effect. From society’s point of view, it’s consumer surplus that is the point and profits are the side effect.
The other route is to make things even more desirable. Competition among bookmakers forced them to make more desirable books and to lower the costs of making books. But then, someone invented eBooks and eBook readers. And then people could have books that didn’t weigh anything and didn’t take up any space. You could take an entire library on an airplane. You could go to another country and your library would already be there waiting for you. For people who prefer that kind of book, that creates consumer surplus. For sellers of eBooks, it means a high volume of sales, which means more profit. So, again, the hope of profits makes producers give consumers something they prefer and the fear of loss makes them control costs and keep prices down.
And that is what competition does. It increases consumer surplus. When producers can hope for a profit and have a real risk of loss, competition translates their attempts to make profits into the creation of consumer surplus. And that is how people create wealth, by increasing what they can get out and reducing what they have to give up.