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.
Consumer’s surplus is the excess of what we are prepared to pay over what we actually pay for a commodity.
It is difference between what we are prepared to pay and what we actually pay.
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.
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.
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.
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.
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.