In this article, we will take a look at how we can determine Consumer Surplus by using the demand function. We will also take a look at the DWL, and how we can determine it.
The Intuition of Consumer Surplus and DWL
Let us first understand what the intuition of Consumer Surplus is — it is simply the difference between the price a consumer pays for a good and the price the consumer would be willing to pay rather than do without it. So, how can we relate this to the demand function? We remember that the point where the demand and supply meet is the equilibrium price. As it turns out, the area below the demand level and above the equilibrium price is the Consumer Surplus. While we won’t talk about it in this article, the area above the supply level and below the equilibrium price is called the Product Surplus. We can illustrate this visually:
We have now understood the idea behind Consumer Surplus. We can now try to understand the concept of DWL — i.e, Deadweight Loss. We can try to understand it through an illustrative example. Imagine that we now add a tax, then we create a new region:
