6.3 Consumer Surplus LO 4, 5
For each unit of a product, consumer surplus is the difference
between the maximum price consumers are willing to pay for that
unit and the price consumers actually pay for that unit.
Consumer surplus arises because demand curves are negatively
sloped and consumers purchase units of a product up to the point
where the marginal value equals the market price. On all units before
the marginal unit, consumers value the product more than the price
and hence they earn consumer surplus.
In market equilibrium, the marginal value to consumers from having
one more unit of the product is given by the market price. This need
not reflect the total value that consumers place on all units of product
consumed. The paradox of value involves a confusion between total
value and marginal value.