Example of calculating consumer surplus from a College Education - FreeEconHelp.com, Learning Economics... Solved!

4/10/12

Example of calculating consumer surplus from a College Education


Receiving a college education is a big deal, and can help improve your opportunities later in life.  For most people, the benefits of receiving a college education far outweigh the costs, which is an example of consumer surplus.  This post goes over the economics of calculating consumer surplus using the market for College Education as an example.

We can start with our typical supply and demand graph focusing on the market for college education.  We can find equilibrium by locating where supply and demand intersect, and following this point to the axis to figure out equilibrium price and quantity.  You can see an example of this in the graph to the right.

Now we need to find the total difference between each consumer’s willingness to pay for college education and the price that they actually have to pay (market equilibrium).  Since the demand curve is a straight line, we can calculate the area below the demand curve and above the equilibrium price by using the area of a triangle formula. 

In this example, the height of the triangle is going to be the difference between the intercept of the demand curve with price (2700) and the market price (1500) times the quantity being purchased (1200) all times ½ because it is a triangle.  This gives us:

!/2(1200*1200) or 720,000 as our consumer surplus.

This means that each individual student gets more benefit from having a college education than the amount they have to pay for it (except for that very last student located at the equilibrium point).  This means that a typical student taking graphic design classes is receiving a much higher benefit in terms of future value the cost being paid from his pocket. 


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