Consumer’s Surplus
The concept of consumer’s surplus was propounded by Alfred Marshall. This concept occupies an important place not only in economic theory but also in economic policies of government and in decision-making of monopolists.
The demand for a commodity depends on the utility of that commodity to a consumer. If a consumer gets more utility from a commodity, he would be willing to pay a higher price and vice-versa. It has been seen that consumers generally are ready to pay more for certain goods than what they actually pay for them. This extra satisfaction which consumers get from their purchase of a good is called by Marshall as consumer’s surplus.
Marshall defined the concep to consumer’s surplus as the“ excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay”, is called consumer’s surplus.”
Thus consumer’s surplus = what a consumer is ready to pay - what he actually pays.
The concept of consumer’s surplus is derived from the law of diminishing marginal utility. As we know from the law of diminishing marginal utility, the more of a thing we have, the lesser marginal utility it has. In other words, as we purchase more of a good, its marginal utility goes on diminishing. The consumer is in equilibrium when the marginal utility of a good is equal to its price i.e., he purchases that many number of units of a good at which marginal utility is equal to price (It is assumed that perfect competition prevails in the market). Since the price is the same for all units of the good he purchases, he gets extra utility for all units consumed by him except for the one at the margin. This extra utility or extra surplus for the consumer is called consumer’s surplus.
Consider Table 7 in which we have illustrated the measurement of consumer’s surplus in case of commodity X. The price of X is assumed to be ` 20.
|
No. of units
|
Marginal Utility
(worth `)
|
Price (`)
|
Consumer’s Surplus
|
|
1
|
30
|
20
|
10
|
|
2
|
28
|
20
|
8
|
|
3
|
26
|
20
|
6
|
|
4
|
24
|
20
|
4
|
|
5
|
22
|
20
|
2
|
|
6
|
20
|
20
|
0
|
|
7
|
18
|
20
|
–
|
We see from the above table that when consumer’s consumption increases from 1 to 2 units, his marginal utility falls from ` 30 to ` 28. His marginal utility goes on diminishing as he increases his consumption of good X. Since marginal utility for a unit of good indicates the price the consumer is willing to pay for that unit, and since price is assumed to be fixed at ` 20, the consumer enjoys a surplus on every unit of purchase till the 6th unit. Thus, when the consumer is purchasing 1 unit of X, the marginal utility is worth ` 30 and price fixed is ` 20, thus he is deriving a surplus of ` 10. Similarly, when he purchases 2 units of X, he enjoys a surplus of ` 8 [` 28 – ` 20]. This continues and he enjoys consumer’s surplus equal to ` 6, 4, 2 respectively from 3rd, 4th and 5th unit. When he buys 6 units, he is in equilibrium because his marginal utility is equal to the market price or he is willing to pay a sum equal to the actual market price and therefore, he enjoys no surplus. Thus, given the price of ` 20 per unit, the total surplus which the consumer will get, is ` 10 + 8 + 6 + 4 + 2 + 0 = 30.
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GST Student friendly Book most relevant/Useful for CA Intermediate/IPCC, CS executive , CWA Intermediate and CA final. ALSO useful for B.Com / M.Com / MBA/ BBA/UPSC/ SSC and Various Govt Exams.!! This book is approved by Ministry of HRD Govt.of India as Students friendly book. Author Name- CA Harshita Raichandani and CA Dhananjay Ojha Book […]
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