CONSUMER SURPLUS

1. INTRODUCTION

The law of consumer surplus was first developed by French engineer A.J. Dupuit in 1844 A.D. to measure the social
benefits of public commodities such as canals, bridges, national highways, etc.
Later on Alfred Marshall rediscovered and redefined the theory of consumer surplus.
A consumer gets surplus when the price he/she actually pays is lower than the price he/she expects or is willing to
pay. Therefore consumer’s surplus is the difference between the price that the consumer is willing to pay and the
price he actually pays.
Thus, C.S. = willing to pay price – actually paid price.
Or C.S. = Total Utility – Total Expenditure.
Example: Euta mobile 10000 rs samma kinxu vanera gaye. Mobile store ma Tara tehi mobile ko price 5000 then I
save Rs. 50000 which is Surplus for me. Therefore, Consumer surplus= WP-AP= 10000-5000 = Rs. 5000
2. STATEMENT

According to Alfred Marshall, ’’Excess of the price which a consumer would be willing to
pay rather than go without a thing over that which he actually pay is the economic measure
of this surplus satisfaction. It may be called consumer surplus.’’
3. ASSUMPTIONS:

• 1. Expected price should be more than actual price.

• 2. Marginal utility must be greater or equal to price of the commodity.
• 3. Utility can be measured in cardinal number, i.e. utils.
• 4. Consumer is a rational person.
• 5. Constant marginal utility of money.
4. EXPLANATION BY TABLE:

Units of Price willing to Actual Price (AP) Consumer Remark

commodity pay (WP) Surplus
1 120 60 60
2 100 60 40 Pays 60 units for
all
3 80 60 20

4 70 60 10

5 60 60 0

Total 430 300 130

5. FIGURE

A Consumer Surplus
WP and AP
60 B
P

0 C
WP-AP=CP opabc (WP)- oc (Ap)= pab
120-60=60 Units of goods
6. EXPLANATION:

• X axis---- quantity of goods

• Y asis--- willing to pay and Actual priceP
• In figure consumer are willing to pay (WP)---means in figure---OPABC-OC=PAB
• For OC amount of goods. So, consumer surplus= PAB
• Similary, ‘P’ st. line is consider as equal to Consumer Surplus.
CRITICISMS OF CONSUMER’S SURPLUS:

• 1. Imaginary: The concept of consumer’s surplus is a purely imaginary idea. We just

imagine what we are prepared to pay and subtract with what we actually pay. It is all
hypothetical.
• 2. Utility is not measureable: The concept of consumer’s surplus is based on the
assumption that utility can be measured in numbers. But utility is a subjective concept.
Therefore, utility cannot be measured quantitatively.
CRITICISMS OF CONSUMER’S SURPLUS

• 3. MU of money not constant: The concept of consumer’s surplus supposes that the marginal utility
of money remains constant throughout the process of exchange. But the marginal utility of money
does not remain constant. In reality, as the consumer spends his money, the amount of money he has
reduces and its marginal utility to him increases.
• 4. Not applicable to necessaries: The concept of C.S. does not apply to necessaries of life. In case of
necessaries surplus is not measurable. For example, if a man is dying of thirst, he may be prepared to
pay any amount of money for a glass of water.
• 5. It neglects complementary and substitute goods: The utility of any commodity depends on other
commodity, but this theory does not explain the role of complementary goods and substitution goods.
 IMPORTANCE OF CONSUMER’S SURPLUS:
• 1. To determine prices of goods and services: This law is very useful to determine the prices of goods and services. If the
consumer surplus is very high, the producer can raise the price of goods and services and vice versa.
• 2. To determine the tax rate: The law of consumer’s surplus is useful to government to determine tax rate. The government
can determine high rate of tax on goods and services that have more consumer surplus and vice versa.
• 3. International trade: The law of consumer’s surplus is significant to estimate the gain from the international trade. The
government can produce and trade those types of goods and services in international market which have more consumers’
surplus.
• 4. Cost-benefit analysis: The law of consumer’s surplus helps in cost benefit analysis as well as in project selection. If the
expected cost incurred is less and benefit is more, then there is a surplus and the project may be selected. On the other hand, if
the consumer feels that they are getting no surplus, the project may not be selected.
• 5. Distinction between value in use and value in exchange: The consumer’s surplus helps us to distinguish between value in
use and value in exchange. Value in use means utility and value in exchange means price of a commodity. Commodities like
salt, match box, etc. have very high value in use but very small value in exchange. Consumer’s surplus from such commodities
is very large because we are prepared to pay much more for such commodities than we actually pay.
PRODUCER’S SURPLUS

• Producers Surplus is defined as the difference between the current market price and the
cost of production.

Symbolically,
P.S=M.P- MCP (i.e Producer Surplus =Market Price of product-Minimum Cost of
Producing
• Example; If Ram produce Jacket at 1000 and sells jacket to Shyam same jacket at price
1500 then producer’s surplus is Rs. 500
TABLE

Units Market Price Mimimum Cost Producer Surplus

(MP) of MOJA of Prodution of
MOJA
1 100 60 100-60=40
2 100 70 30
3 100 80 20
4 100 90 10
5 100 100 0
TOTAL 500 400 500-400=Rs. 100
FIGURE

• Y C
• P B
• MP and MCP PS= MP- MCP= 500-400
• =100
• A
• Producer Surplus
• O Q1 X
• Units
 EXPLANATION

• X axis- units
• Y axis- MP and MCP
• PB is the market price line in figure
• AC is the MCP line
• Above AB is the supply line above supply line is Producer Surplus
Graphically, PAB is producer Surplus OAPBQ1-OQ1= PAB
Therefore, MP - MCP= PS
THANK YOU..

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