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.
