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Consumer Surplus

Consumer Surplus is one of the very important concept in the modern economic analysis. The Concept Consumer Surplus was introduced by Prof. A. J. Dupuit, in the year 1844. But this concept was developed by Prof. Alfred Marshall in the year 1890, in his famous book ‘The Principles of Economics’
 
Marshall says: “Consumer Surplus is the excess of price which a person is willing to pay, rather than to go without the thing, over which he actually does pay”.
 
Prof. Taussig defines: “Consumer Surplus is the difference between the potential price and the actual price”.
 
Hence in short, consumer surplus might be defined as the difference between the price, what you are actually prepared to pay and the price what you have actually paid.

 

Example:

Suppose, For a movie ticket, if you are ready to pay ₹ 100, but you actually pay ₹ 60. Hence according to definition the difference between your potential price (100) and the actual price (60) is ₹ 40.

 

Hence ₹ 40 is the Consumer Surplus.

 
 
Here we should note that the potential ability to pay or the price what a consumer is prepared to pay depends upon the marginal utility that he is going to get from a particular product. The consumer will continue purchasing a product as long as the utility that he is going to get is more or equal to price. Once the price that he is offering and the utility that he is going to get becomes equal, the consumer stops purchasing. As we know that Marginal Utility is subject to diminishing. Hence the potential price or the price what a consumer is prepared to pay also goes on diminishing.
 
This concept could be better understood by an example:

 

Number of times

Potential Price /Price prepared to Pay/MU

Actual Price

Consumer surplus per unit

1

100

40

60

2

80

40

40

3

60

40

20

4

40

40

Nil

 

Total Utility: 280 Total Consumer Surplus: 120
 
Consumer Surplus could be found out in the following way-
 
Consumer Surplus = Total Utility – Price X Quantity
= 280 – 40 X 4
= 120
 
Description: 19280.png
 
Assumptions to Consumer Surplus
  • The utility of a commodity can be exactly measured. That means cardinal measurability of utility is possible.
  • The product that a consumer is willing to purchase has no close substitutes.
  • Price is the only determinant factor of demand.
Criticisms to Consumer Surplus
  • Measuring utility in numbers is not possible.
  • There are wide varieties of substitutes available.
  • Price is not the only factor determining the demand. There are several other factors, which influences the demand.

Importance of Consumer Surplus:

  • Helps to compare the standard of living of people: If the consumer surplus is more then the standard of living of the people will be more and on the other hand if the consumer surplus is less then the standard of living of the people will also be less. Hence standard of living of the people varies directly with the consumer surplus.
  • Helps in fixing up prices: If the consumer surplus is more than a small increase in the price level will not affect the purchase. Hence the prices of those products can be increased. If the consumer surplus is less, then the increase in price will curtail the demand for that particular product.
  • Helpful in knowing the benefit from international trade: It is always observed that imported goods are cheaper than the domestic goods and possess more consumer surplus. Hence larger the volume of international trade the greater will be the benefit derived by the consumer.
  • Helps the government in imposing taxes: If consumer is enjoying more surplus with regard to a particular product, then government might think of imposing tax on those commodity. Since the surplus is more, a little bit increase in price will not affect the demand for that particular product.




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