Consumer's Surplus

Consumer's Surplus

The concept of consumer surplus was originally introduced by classical economists and later modified by Jevons and Jule Dupuit, the French Engineer Economist in 1844. But a most refined form of the concept of consumer surplus was given by Alfred Marshall. This concept is based on the Law of Diminishing Marginal Utility.

Definition

Alfred Marshall defines consumer’s surplus as, “the excess of price which a person would be willing to pay a thing rather than go without the thing, over that which he actually does pay is the economic measure of this surplus satisfaction. This may be called consumer’s surplus”.

Assumptions

1.        Marshall assumed that utility can be measured.

2.        The marginal utilities of money of the consumer remain constant.

3.        There are no substitutes for the commodity in question.

4.        The taste, income and character of the consumer do not change.

5.        Utility of one commodity does not depend upon the other commodities.

Explanation

The concept of consumer’s surplus can be explained with help of an example. Suppose a consumer wants to buy an apple. He is willing to pay  Rs.4, rather than go without it and the actual price of the apple is  Rs.2. Hence the consumer’s surplus is  Rs.2( Rs.4- Rs.2). Thus, consumer’s surplus is the difference between the price that a consumer is willing to pay (potential price) and what he actually pays. Therefore,

Consumer’s surplus = What a person is willing to pay – What he actually pays.

OR

Consumer’s surplus = Potential price – Actual price.

Mathematically

Consumer’s surplus = TU – (P x Q)

where,

TU = Total Utility, P = Price and Q= Quantity of the commodity

The measurement of consumer’s surplus is illustrated in Table 2.3.

In Table 2.3 the consumer is willing to pay rupees 6, 5, 4, 3 and 2 for purchasing the successive units of apples. Hence, he is willing to pay (Potential Price Total Utility)  Rs.20 for apples. But, he actually pays  Rs.10 ( Rs.2 x 5)) for getting 5 apples. Hence,

Consumer’s Surplus = Total Utility (Actual Price x units of Commodity)

= TU – (P x Q) 

= –(2 x 5)

= 20-10 = 10.

The concept of Consumer’s Surplus can also be explained with the help of a diagram.

In the diagram 2.3, X axis shows the amount demanded and Y axis represents the price. DD1 shows the utility which the consumer derives from the purchase of different amounts of commodity. When price is OP, the amount demanded is OQ.

Hence, actual price is OPCQ (OP x OQ).

Potential Price (Total Utility) is ODCQ.

Therefore,

Consumer’ Surplus = ODCQ – OPCQ = PDC (the shaded area)

Criticism

1.        Utility cannot be measured, because utility is subjective.

2.        Marginal utility of money does not remain constant.

3.        Potential price is internal, it might be known to the consumer himself.