Australia's Gambling Industries - Productivity Commission

C
Estimating consumer surplus
C.1 What is consumer surplus?
The consumer surplus from the purchase of any quantity of a product is the
difference in dollars between the amount which the consumer pays for this product
and the maximum amount which the consumer would be prepared to pay rather than
do entirely without the product.
For a group of consumers, this can be understood by observing that at a given price
a certain quantity of a product will be sold in the market. If the price falls, more of
the product is sold, and both the original and new consumers who purchase at the
new lower price are better off. The original consumers, who had been willing to pay
the higher price, have gained a consumer surplus on their original purchases
equivalent to the difference between the old and new prices. In other words,
consumer surplus occurs when consumers pay less for a good or service than they
are willing to pay for that good or service. The gain, in terms of consumer surplus,
from the introduction of a new product is illustrated in figure C.1 below.
Figure C.1
Consumer surplus
Price
p
2
Dc
D
x 2
x
Quantity
The consumer surplus resulting from the introduction of a new product can be
represented by the area underneath the demand schedule (or demand curve) for that
ESTIMATING
CONSUMER SURPLUS
C.1