Consumer Surplus

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  • Topic: Supply and demand, Economic surplus, Colgate-Palmolive
  • Pages : 3 (606 words )
  • Download(s) : 263
  • Published : May 18, 2011
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Consumer Surplus:
The difference between the maximum price that consumers are willing to pay for a good and the market price that they actually pay for a good is referred to as the consumer surplus. The determination of consumer surplus is illustrated in Figure 1, which depicts the market demand curve for some good. 

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The market price is $5, and the equilibrium quantity demanded is 5 units of the good. The market demand curve reveals that consumers are willing to pay at least $9 for the first unit of the good, $8 for the second unit, $7 for the third unit, and $6 for the fourth unit. However, they can purchase 5 units of the good for just $5 per unit. Their surplus from the first unit purchased is therefore $9 - $5 = $4. Similarly, their surpluses from the second, third, and fourth units purchased are $3, $2, and $1, respectively. These surpluses are illustrated by the vertical bars drawn in Figure 1 . The sum total of these surpluses is the consumer surplus:  |

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Importance of Consumer’s Surplus:
The concept of consumer’s surplus has both theoretical as well as practical importance. (1) Theoretical importance: The idea of consumer’s surplus reveals the benefits which we derive from our purchase of the commodity in the market. For example, when we purchase salt, or a match box, we are willing to pay the amount much higher than their market value. For example, a consumer would be willing to pay $10 for a match box rather than go without it but he actually pay Re one only on the purchase of a match box. Consumer’s surplus on the purchase of match box thus is $ 9.0. (2) Practical importance: A monopolist can charge higher price for his product if the consumers are enjoying large consumer’s surplus on the use of his product. (3) The inhabitants of a country derive consumer's surplus when they import commodities from abroad. They are usually prepared to pay more for than what they actually pay. (4) A finance minister imposes...
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