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Consumer Surplus
The concept of consumer surplus was first formulated by deposit in 1844 to measure social benefits of public good such as canals bridges notation high wars. Marshall further refined and popularized this in these principles of economic published in 1890 the concept of consumer surplus became the basis of old welfare economics. Marshall Concept of consumer surplus was based on the cardinal measurability and interpersonal comparison of utility. According to him every increase in consumer surplus is an indicator of the increase in social welfare. As we shall see below consumer surplus is simply the difference between the price that one is willing to pay and the price on actually pays for a particular product.
Concept of consumer surplus is a very important concept in economic theory especially in theory of demand and welfare economics. This concept is important not only in economic theory but also in formulation of economic policies such as taxation by the government and price policy pursued by the monopolistic seller of a product. Te essence of the concept of consumer surplus is that a consumer derives extra satisfaction from the purchase the daily makes over the price they actually pays for them. In other words people generally get more utility form the consumption of goods than the price they actually pay for them. It has been found that people are repaired to pay errs obtain form buying a good has been called consumer surplus. Thus marshal defines the consumer surplus in the following words excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay is the economic measure of this surplus satisfaction it may be called consumer surplus.
The amount of money which a person is willing to pay for a good indicates the amount of utility be derives form that good the greater the amount of money he is willing to pay the greater the utility be obtains form it therefore the marginal utility of a unit of a good determines the price a consumer will be prepared to pay for that unit. The total utility which a person gets from a good is given by the sum of marginal utilities (ΣMU) of the units of a good purchased and the total price which they actually pays is equal to the price per unit of the goods multiplies by the number of unit of it purchased. Thus:
Consumer surplus = what a consumer is willing to pay minus what he actually pays.
= Σ marginal utility – (price X number of units of a commodity purchased)
The concept of consumer surplus is derived from the law of diminishing marginal utility. As we purchase more units of a good its marginal utility goes on diminishing. It is because of the diminishing marginal utility that consumer willingness to pay for additional units of a commodity declines as he has more units of the commodity. The consumer is in equilibrium when marginal utility form a commodity becomes equal to its given price. In other words consumer purchases the number of units of commodity at which marginal utility is equal to prices. This means that at the margin what a consumer will be willing to pay (marginal utility) is equal to the price he actually pays. But for the previous units which he purchases. His willingness today (or the marginal utility he derives from the commodity) is greater than the price he actually pays for them. This is because the price of the commodity is given and constant for him and therefore price of all the units is the same.
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Concept of consumer surplus is a very important concept in economic theory especially in theory of demand and welfare economics. This concept is important not only in economic theory but also in formulation of economic policies such as taxation by the government and price policy pursued by the monopolistic seller of a product. Te essence of the concept of consumer surplus is that a consumer derives extra satisfaction from the purchase the daily makes over the price they actually pays for them. In other words people generally get more utility form the consumption of goods than the price they actually pay for them. It has been found that people are repaired to pay errs obtain form buying a good has been called consumer surplus. Thus marshal defines the consumer surplus in the following words excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay is the economic measure of this surplus satisfaction it may be called consumer surplus.
The amount of money which a person is willing to pay for a good indicates the amount of utility be derives form that good the greater the amount of money he is willing to pay the greater the utility be obtains form it therefore the marginal utility of a unit of a good determines the price a consumer will be prepared to pay for that unit. The total utility which a person gets from a good is given by the sum of marginal utilities (ΣMU) of the units of a good purchased and the total price which they actually pays is equal to the price per unit of the goods multiplies by the number of unit of it purchased. Thus:
Consumer surplus = what a consumer is willing to pay minus what he actually pays.
= Σ marginal utility – (price X number of units of a commodity purchased)
The concept of consumer surplus is derived from the law of diminishing marginal utility. As we purchase more units of a good its marginal utility goes on diminishing. It is because of the diminishing marginal utility that consumer willingness to pay for additional units of a commodity declines as he has more units of the commodity. The consumer is in equilibrium when marginal utility form a commodity becomes equal to its given price. In other words consumer purchases the number of units of commodity at which marginal utility is equal to prices. This means that at the margin what a consumer will be willing to pay (marginal utility) is equal to the price he actually pays. But for the previous units which he purchases. His willingness today (or the marginal utility he derives from the commodity) is greater than the price he actually pays for them. This is because the price of the commodity is given and constant for him and therefore price of all the units is the same.
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