Dupuit originated the concept of consumer’s surplus. But, it was Marshall who popularized it by presenting it in a most refined way. Marshall viewed that when a consumer buys a commodity, his satisfaction derived from derived from it may be in excess of the dissatisfaction he has experienced in parting with money for paying its price. This excess of satisfaction is called” consumer’s surplus”.
A consumer is willing to pay the price for a commodity upto its marginal utility compared with the marginal utility of money which he has to pay. If the marginal utility of a commodity is high which is actual market price is low, the consumer derives extra satisfaction, that is, consumer surplus. Consumer surplus therefore can be measured as the difference between the maximum price the consumer is willing to pay for a commodity and the actual market price charged for it. As Marshall puts it, “the excess of the price which a consumer would be willing to pay rather than go without the things over that which he actually does pay, is the economic measure of this surplus of satisfaction. It may be called consumer’s surplus.”
This concept is based on the law of diminishing marginal utility.
Prof. Marshall applies the phrase’ consumer’s surplus’ to the difference between the sum which measures total utility and that which measures total exchange value(price paid). For, while the price that he has to pay for each unit is equal to the utility of the marginal unit, the utility of each of the earlier units is more than that of the last. Therefore, he gains more utility than he loses by making the payments. His gain is more than the loss. This is the source of his surplus satisfaction. Thus:
Consumer Surplus = Price Prepared – Actual Price Paid.
Thus,
CS = TU – (P x Q)
97 - (10 x 4)
97 – 40
CS = 57
Where,
- CS: Consumer surplus
- TU: Total utility
- P: Price
- Q: Quantity
Consumer Surplus can be Diagrammatically Represented:
If OP is price, OQ is the units purchased MU of OQ = price OP total money paid = OP x OQ therefore, price paid OPQR
Price prepared to pay = Total Utility OMRQ
Therefore, OMRQ – OPRQ = MRP (consumer surplus).
Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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