Consumer Surplus

Consumer surplus is the satisfaction that a consumer obtains from a good over and above the
price paid. This is the difference between the maximum demand price that buyers are willing
to pay and the price that they actually pay. A related notion from the supply side of the
market is producer surplus.

Example: Suppose, for example, that Rahul is willing and able to pay 30 for a packet of
chips. This is his demand price. However, the going market price, the actual price that
everyone pays for a packet of chips is 25. While Rahul is willing and able to pay 30, he pays
only 25. He receives a 5 consumer surplus on this purchase.

Alfred Marshall, British Economist defines consumer’s surplus as follows: “Excess of the
price that a consumer would be willing to pay rather than go without a commodity over that
which he actually pays.”

Hence, Consumer’s Surplus = The price a consumer is ready to pay – The price he actually
pays

Further, the consumer is in equilibrium when the marginal utility is equal to the price. That is,
he purchases those many numbers of units of a good at which the marginal utility is equal to
the price. Now, the price is fixed for all units. Hence, he gets a surplus for all units except the
one at the margin. This extra utility is consumer surplus. From the table above, we see that as
the consumption increase from 1 to 2 units, the marginal utility falls from 30 to 28. This
diminishes further as he increases consumption. Now,

 Marginal utility is the price the consumer is willing to pay for that unit.
 The actual price of the unit is fixed.
Therefore, the consumer enjoys a surplus on all purchases until the sixth unit. When he buys
the sixth unit, he is in equilibrium, since the price he is willing to pay is equal to the actual
price of the unit.
In the figure, you can see that the X-axis measures the amount of commodity, while the Y-
axis measures the price and marginal utility. Further, MU represents the marginal utility
curve, sloping downwards. This indicates that as the marginal utility falls, the consumer
purchases more units of the commodity and vice-versa. Next, if OP is the price of a unit of
the commodity, the consumer is in equilibrium only when he purchases OQ units. In other
words, when marginal utility is equal to the price OP.
Further, the Qth unit does not yield any surplus since the price and marginal utility is equal.
However, for the purchase of all units before the Qth unit, the marginal utility is greater than
the price, offering a surplus to the consumer. In Fig above, the total utility is equal to the area
under the marginal utility curve up to point Q (ODRQ). However, for price = OP, the
consumer pays OPRQ. Hence, he derives extra utility equal to DPR which is consumer
surplus. Consumer’s Surplus: The upper triangle represents the difference between the
potential price and actual price paid by the buyers for all the units between O and Q.

Limitations:
1. It is difficult to measure the marginal utilities of different units of a commodity
consumed by a person. Hence, the precise measurement of consumer’s surplus is
not possible.
2. For necessary goods, the marginal utilities of the first few units are infinitely
large. Hence the consumer’s surplus is infinite for such goods.
3. The availability of substitutes also affects the consumer’s surplus.
4. Deriving the utility scale for prestigious goods like diamonds is very difficult.
5. We cannot measure the consumer’s surplus in terms of money. This is because the
marginal utility of money changes as a consumer makes purchases and his stock
of money diminishes.
6. This concept is acceptable only on the assumption that we can measure utility in
terms of money or otherwise. Many modern economists are against the concept.

References:

https://www.toppr.com/guides/business-economics/theory-of-consumer-behavior/consumer-
surplus/