Consumer’s
surplus is one of the most important concepts in Economics. It was expounded by
Alfred Marshall. We often find that the price we pay for a commodity is usually
less than the satisfaction we derived from its consumption for example, when we
purchase a packet of salt, match-box, news paper etc. and consume, the
satisfaction derived from those is greater as compared to the price paid for
them. This what consumer surplus mean. The concepts can be defined as under.
1.
Consumer’s surplus is the excess of what we are prepared to pay over what we
actually pay for a commodity.
2.
It is difference between what we are prepared to pay and what we actually pay.
3.
Consumer’s surplus: Total Utility - Total Amount spend
Explanation:
We can illustrate the concept of consumer’s surplus with the help of the table
given below.
Unit (Orange) |
Marginal
Utility
|
Price
(Rs.)
|
Consumer’s
Surplus
|
1
|
10
|
2
|
8
|
2
|
8
|
2
|
6
|
3
|
6
|
2
|
4
|
4
|
4
|
2
|
2
|
5
|
2
|
2
|
0
|
Total
|
30
|
10
|
20
|
Hence consumer’s surplus = Total Utility –
total amount spent
= 30 -
10 i.e. 20.s
It is assumed in the above table the price of
oranges in the market is Rs. 2.00 per orange. A consume will purchase as may
oranges as make his, marginal utility equal to the price. Thus he will purchase
5 orange and pay for each Rs. 2.00. In this way he will spend Rs. 10.00 But the
total utility of the 5 oranges is equal to Rs. 30.00. He thus gets a consumer’s
surplus equal to (30-10) Rs. 20.00
The consumer’s surplus can also be found from
fourth column of the table. The utility of the first unit of oranges to the
consumer is equal to Rs. 10.00, therefore be would be prepared to pay Rs. 10.00
for it’s rather than go with out is. But be pays for the first orange only Rs.
2.00, because the price of an orange in the market is Rs. 2.00. Therefore, from
the first unit, the consumer is surplus equal to (10-2) = Rs. 8.00, which is
written in the fourth column. Similarly the utility of second orange is equal
to 8 while the consumer pays Rs. 2.00 for its and therefore obtains (8-2) = Rs. 6.00 as consumer’s surplus.
From 5th orange the consumer derives satisfaction equal to Rs. 2.00 and as such
the consumer’s surplus from fifth unit is equal to (2-2) = 0. Thus if we
calculate the total utility obtained (i.e. 30) and total amount paid (Rs.
10.00), the consumer’s surplus as given in column no four is equal to. Rs.
20.00
Practically however the measurement of
consumer’s surplus is not simple. There are numerous difficulties to measure
consumer’s surplus exactly in the market but it is possible to have rough
estimate which is of very great practical value.
Criticism:
The
concept of consumer’s surplus has been critised on several grounds.
1. It is said that this concept is imaginary
idea. It is very difficult to say how much one is prepared to pay and if it is
said it will unreal.
2. It is very difficult to measure exactly.
Because different people are prepared to pay different amount (price) and hence
it is very difficult to measure total consumer’s surplus in the market.
3. This concept does not apply to
necessaries. For example, if we ask how much a man be prepared to pay for a
glass of water when he is dying of thirst, it is very difficult to say an exact
amount. Thus, consumer’s surplus in such cases is immeasurable.
Importance of consumer’s surplus: This
concept is useful in a number of ways.
In public finance:
It is
very useful to Finance Minister in imposing taxes and fixing the rates. He will
impose more taxes on commodities in which consumer’s surplus is more.
• To the businessman and monopolistic as they
can increase the price of the commodities in which there is large consumer’s
surplus.
• Comparing advantages of different places.
• Measuring Benefits from international
trade.
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