What is consumer surplus? How is it illustrated on a demand and supply diagram?

Consumer surplus is the difference between the highest price a consumer is willing to pay for a good or service and the actual price they pay. In other words, it measures the monetary gain obtained by consumers because they can purchase a product for a price that is less than the maximum they are willing to pay. This results in a sense of utility or satisfaction for the consumers.

A demand and supply diagram is a graphical representation of the relationship between the quantity of a good that consumers are willing to buy (demand) and the quantity that producers are willing to produce and sell (supply) at different prices. The demand curve slopes downward, reflecting the fact that as the price of a good increases, the quantity demanded decreases, all other things being equal. On the opposite hand, the supply curve slopes upward because as the price of a good increases, the quantity supplied by producers increases.

Now, let's illustrate consumer surplus on a demand and supply diagram: 1. Draw a downward-sloping demand curve. 2. Draw an upward-sloping supply curve that intersects the demand curve. 3. Label the intersection point as the equilibrium point, where the quantity demanded equals the quantity supplied. This point also corresponds to the equilibrium price and quantity. 4. Locate and mark the price that matches the equilibrium quantity on the vertical axis (price axis). Draw a horizontal line from this price point to the demand curve. 5. Consumer surplus can be illustrated as the area between the demand curve and the horizontal line you just drew, and above the equilibrium price line. This area forms a triangle with the price axis, the horizontal line, and the part of the demand curve above the equilibrium price. In summary, consumer surplus is the difference between the highest price consumers are willing to pay and the actual price they pay for a good or service, and it can be illustrated as a triangular area on a demand and supply diagram.