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 CONTENTS
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G.Y
    
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›NTRODUCT›ON
Y
The excess of total value over market value is called consumer surplus. Consumer
surplus reflects the benefit we gain from being able to buy all units at the same low
price. ›n simple terms, consumer·s surplus means ´The net gain from a purchaseµ. ›t
is the difference between the value, the consumer of commodity X purchased and the
amount that the market requires the consumer to pay for that quantity of commodity
X. Or it is the difference, between the price consumers actually pay for a commodity
and the price they would be willing to pay for that commodity. The consumer·s
surplus, a person derives from buying a certain unit of a good is obtained graphically
by drawing the person·s demand curve as a set of bars whose heights represent the
marginal utilities of the corresponding quantity of goods, and then drawing a
horizontal line whose heights represent the price of the good. The sum of the heights
of the bars above the horizontal line-i.e., the area of the demand (marginal utility) bars
above those horizontal line-measures the total consumer·s surplus that the purchase
yields.


 DEMAND SCHEDULE FOR THE BUYERS

PR›CE OF ALBUM á
  




More than $100 None 0

$^0 to $100 John 1

$—0 to $^0 John, Paul 

$0 to $—0 John, Paul, George ë

$0 or less John, Paul, George, Ringo 4

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 THE DEMAND CURVE

YY
Y


 EXPLANAT›ON OF THE GRAPH

Y
Y ›n this graph, panel A shows that the price of the album is $^0. Here the
consumer John is willing to pay $100 but the album is available to him at
$^0.So his consumer surplus is $0. The panel B shows that there are two
consumers in the market. Here, now the price of the album is $—0. The
consumer John is willing to pay $100 this time, so his consumer surplus is $ë0
whereas the consumer Paul is willing to pay $^0 for the album, so his consumer
surplus is $10. Thus the total consumer surplus for both of them is $40.

Y
 HOW THE PR›CE AFFECTS CONSUMER
SURPLUS

Y
Y

Y
Y

Y

 EXPLANAT›ON OF THE GRAPHY

Y This graph shows that the consumers· willingness to pay for the commodity is
¶OA·. Panel A shows that the actual price of the commodity is ¶OP1·. So here
the area of consumer surplus is ´area of ¨ AP1C i.e. ½ .AP1.BCµ. Panel B
shows that the actual price of the commodity shifts from P1 to P. Thus the
quantity of commodity demanded increases from OQ1 to OQ. Thus new
consumer surplus is ¨ ADF. Thus the additional consumer surplus to initial
consumer is BDEC and the consumer surplus for new consumers is ¨ CEF.

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 WHAT DOES CONSUMER SURPLUS
MEASURE?

Y
Y The goal in developing the concept of consumer surplus is to make judgments
about the desirability of market outcomes. Consumer surplus is a good
measure of economic well-being if policy makers want to respect the
preferences of buyers. ›n some circumstances, it will not be considered as a
good measure. ›f we imagine a policymaker trying to design a good economic
system, would we care about the amount of consumer surplus?Consumer
surplus, the amount that buyers are willing to pay for a good minus the amount
they actually pay for it ,measure the benefit that buyers receive from a good as
the buyers themselves perceive it. Thus, consumer surplus, is a good measure
of economic well being if policy makers want to respect the preference of
buyers.

For example, drug addicts are willing to pay a high price for heroin. From the
standard point of society, willingness to pay in this instance is not a good
measure of the buyers benefit, and consumer surplus is not a good measure of
economic well being ,because addicts are not looking after their own best
interests.

"
 APPL›CAT›ONS OF CONSUMER SURPLUS

Y Economists use consumer surplus when they are performing a ¶cost benefit
analysis·, which attempt to determine the cost and benefit of a government
program.

Y ›t points to the enormous privilege enjoyed by citizens of modern societies.

Each of us enjoys a vast array of enormously valuable goods that can be bought
at low prices. This is a humbling thought.

Y ›t helps in explaining water diamond paradox.

Why is it that water, which is essential to life, cost so little than diamonds? This
paradox is resolved by working out total benefit and marginal benefit of water and
diamonds. The total benefit from consuming water is very high since it is an essential
but its marginal benefit is very low as it has abundance supply and costs very low.

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Thus, water has low price and large consumer surplus. Diamonds are scarce in supply
and have high price. Thus, diamonds consumer surplus is less.

YYYYYYY

CONCLUS›ON :
Y
The main goal in developing the concept of consumer surplus is to make judgments
about the desirability of market outcomes. Consumer surplus is a good measure of
economic well being if policymakers want to respect the preference of buyers. ›n
some circumstances, policymakers might choose not to care about consumer surplus
because they do not respect the preferences that drive buyer behavior. ›n most
markets however, consumer surplus does reflect economic well being. Economists
normally assume that buyers are rational when they make policy decisions. Rational
people do the best they can do to achieve their objectives, given their opportunities.
Economists also normally assume that people·s preferences should be respected. ›n
this case, consumers are the best judges of how much benefit they receive from the
goods they buy.

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B›BL›OGRAPHY
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