Measurement of Consumers Surplus

Measurement of Consumers Surplus:

Consumer’s Surplus for a single commodity is measured as shown below:

Consumer’s surplus = Potential price – Actual price


Potential price is the price that a consumer is willing to pay for a commodity and real price is the price that the consumer really pays for that commodity.

Table: Measurement of Consumer’s Surplus

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Consumer’s surplus is established by the potential price of the commodity purchased and the real price in the market price. Therefore the consumer’s surplus is the difference among the sum of marginal utilities (that is, the total utility) minus the net money spent (i.e., price multiplied by quantity purchased) on the commodity. This can be exemplified by a table.

In above table, we supposed that the market price of the commodity is $ 10/- (i.e., column 3). Column 2 provides the marginal utility. Marginal utility elucidates the price that a consumer is willing to pay for the unit of the commodity. Since more and more units of a commodity is bought, the marginal utility declines. Thus the price, that the consumer is willing to pay, also reduces. The difference among marginal utility (i.e., potential price) and the market price (i.e., actual price) provides the consumer’s surplus. Therefore from the table consumer’s surplus for each and every unit is the difference among Marginal Utility (i.e., column 2) minus market price (i.e., column 3). The consumer’s excess for all units can be computed as net utility minus the net amount spent on the commodity that is, consumer’s surplus = $ 150 – 50 = $ 100. Consumer’s excess can be exemplified with a diagram by taking units of the commodity on x-axis and the utility and price on y-axis.
 
In the above figure, MU is the marginal utility curve. OP is the price and OM is the quantity bought. For OM units, the consumer is willing to pay OAEM. The real amount he pays is OPEM. Therefore consumer’s surplus is OAEM – OPEM = PAE (i.e., the shaded region).

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A rise in the market price decreases consumer’s surplus. A fall in the market price raises the consumer’s surplus.

 

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