The concept of consumer surplus was originally introduced by classical economists and it got modified by Jevons and Jule Dupuit. In other words refined form of the concept of consumer surplus was given by Alfred Marshall. Similarly this concept is based on the Law of Diminishing.
Therefore, it is the difference between the price that consumers pay and the price that they are willing to pay.
- Firstly, the utility can be measured
- Secondly, the marginal utilities of money of the consumer remain constant
- There are no substitutes for the
- The taste, income and character of the consumer do not change.
- Utility of one commodity does not depend upon the other commodities
- Demand for a commodity depends on its price alone; it excludes other determinants of demand
For instance, a consumer wants to buy a apple. Similarly, The actual price of the apple is 2 and the consumer is willingly to pay Rs 4.
Therefore, Consumer surplus is potential price – actual price
To sum up Cnsumer Surplus = TU – (P*Q)
TU = Total utility
P = price
Q = quantity of the commodity
Firstly, Consumer surplus schedule
|Units of commodity (apple)||Potential price||Actual Price||Consumer surplus|
In the above figure, MU is the marginal utility curve. OP is the price and OM is the quantity purchased. after that for OM units, the consumer is willing to pay OAEM. The actual amount he pays is OPEM. Therefore, Consumer’s surplus is OAEM – OPEM = PAE (the shaded area). Above all a rise in the market price reduces consumer surplus In purchased. Similarly a fall in the market price increases the consumer’s surplus.
- Firstly, utility is subjective and cannot be measured.
- Secondly, marginal utility of money does not remain constant
- Thirdly, potential price is internal, it might be known to the consumer himself
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