Consumer Surplus

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Consumer Surplus
Brief description about the concept (1-2 lines)?
Dr. K. Narayanan Professor Department of
Humanities and Social Sciences IIT Bombay
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Definitions and Keywords
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• Concept of consumer surplus first formulated by
  Dupuit in 1844 and further refined and
  popularised by Marshall in his book Principles
  of Economics published in 1890.
• It is the basis of Welfare Economics.
• Welfare economics the study of how the
  allocation of resources affects economic
  well-being.
• Definition- Consumer surplus is simply the
  difference between the price that one is willing
  to pay and the price one actually pays for a
  particular product.

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Definition Contd

• Excess of the price which a consumer would be
  willing to pay, rather than go without a thing
  over that he actually does pay, is the economic
  measure of this surplus satisfactionit may be
  called consumer surplus.- Marshall
• Therefore consumer surplus equals buyers
  willingness to pay for a good minus the amount
  they actually pay for it, and it measures the
  benefit buyers get from participating in a
  market.
• Consumer surplus can be computed by finding the
  area below the demand curve and above the price.

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Definitions of the components
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1. Marginal Buyer Someone willing to buy at the
present price but who would be deterred by any
increase. 2. Demand curve shows the willing
ness of the consumer to pay for a product. It is
used to measure the consumer surplus 3. Consumer
surplus At any given quantity the price given by
the demand curve reflects the willingness to pay
of the marginal buyer. Consumer surplus can be
measured as area below demand curve and above the
price. 4. Willingness to pay In economics, the
willingness to pay (WTP) is the maximum amount a
person would be willing to pay, sacrifice or
exchange for a good. 5. Marginal Utility in
economics, the additional satisfaction or benefit
(utility) that a consumer derives from buying an
additional unit of a commodity or service. The
concept implies that the utility or benefit to a
consumer of an additional unit of a product is
inversely related to the number of units of that
product he already owns.
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Definitions of the components
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6. Total Utility The aggregate level of
satisfaction or fulfillment that a consumer
receives through the consumption of a specific
good or service. Each individual unit of a good
or service has its own marginal utility, and the
total utility is simply the sum of all the
marginal utilities of the individual units.
Classical economic theory suggests that all
consumers want to get the highest possible level
of total utility for the money they spend. 7.
Marginal Value it is what one more unit of a good
is worth to you in terms of other goods. 8.
Equilibrium is found where supply and demand are
equal. This is the point where both sellers and
buyers are happy with the price and quantity.
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Questionnaire
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• 1. Suppose Ashish, Sanjana and Sara are bidding
  in an auction for a mint-condition video of
  Charlie Chaplin's first movie. Each has in mind a
  maximum amount that s/he will bid. This maximum
  is called
• Answers
• a resistance price
• willingness to pay
• Consumer surplus
• producer surplus
• 2. Willingness to pay
• Answers
• a) measures the value that a buyer places on a
  good.
• b) is the amount a seller actually receives for a
  good minus the minimum amount the seller is
  willing to accept.
• c) is the maximum amount a buyer is willing to
  pay minus the minimum amount a seller is willing
  to accept.
• d) is the amount a buyer is willing to pay for a
  good minus the amount the buyer actually pays for
  it.

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Questionnaire
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• 3. Consumer surplus is
• a) the amount a buyer is willing to pay for a
  good minus the amount the buyer actually pays for
  it.
• b) the amount a buyer is willing to pay for a
  good minus the cost of producing the good.
• c) the amount by which the quantity supplied of
  a good exceeds the quantity demanded of the good.
• d) a buyer's willingness to pay for a good plus
  the price of the good.
• 4. When a buyers willingness to pay for a good
  is equal to the price of the good,
• a) the buyers consumer surplus for that good is
  maximized.
• b) the buyer will buy as much of the good as the
  buyers budget allows.
• c) the price of the good exceeds the value that
  the buyer places on the good.
• d) the buyer is indifferent between buying the
  good and not buying it.

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Questionnaire
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• 5. If a consumer places a value of Rs.15 on a
  particular good and if the price of the good is
  Rs.17, then
• a) the consumer has consumer surplus of Rs. 2 if
  he or she buys the good.
• b) the consumer does not purchase the good.
• c) the market is not a competitive market.
• d) there is going to be downward pressure on the
  price of the good.
• 6. If a consumer is willing and able to pay Rs.
  20 for a particular good and if he pays Rs.16 for
  the good, then for that consumer, consumer
  surplus amounts to
• a) Rs. 4.
• b) Rs.16.
• c) RS. 20.
• d) Rs. 36.

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Questionnaire
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• 7. Suppose Ravi, Swati and Anita all purchase
  bulletin boards for their rooms for Rs.15 each.
  Ravi's willingness to pay was Rs.35, Swati's
  willingness to pay was Rs.25, and Anita's
  willingness to pay was Rs. 30. Total consumer
  surplus for these three would be
• a) Rs.15.
• b) Rs. 30.
• c) Rs. 45.
• d) Rs. 90.
• 8. Suppose Raj, Amit, and Anju each purchase a
  particular type of cell phone at a price of
  Rs.80. Rajs willingness to pay was Rs.100,
  Amits willingness to pay was Rs.95, and Anju's
  willingness to pay was Rs.80. Which of the
  following statements is correct?
• a) For the three individuals together, consumer
  surplus amounts to Rs.35.
• b) Having bought the cell phone, Anju is better
  off than she would have been had she not bought
  it.
• c) Had the price of the cell phone been Rs.95
  rather than Rs.80, Raj and Amit definitely would
  have been buyers and Anju definitely would not
  have been a buyer.
• d) The fact that all three individuals paid
  Rs.80 for the same type of cell phone indicates
  that each one placed the same value on that cell
  phone.

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Links for further reading

• Reference websites
• http//tutor2u.net/economics/content/topics/market
  sinaction/consumer_surplus.htm
• http//www.economicshelp.org/blog/concepts/definit
  ion-of-consumer-surplus/
• Books
• Henderson and Quandt,1971, Micro Economic Theory
  - A Mathematical Approach,2nd Edition.
• Salvator Dominick,2003,Micro Economic Theory and
  Application,4th Edition.
• Taylor.J.B. and Gugnani Ritika,2008, Principles
  of Micro Economics,5th Edition.
• Research papers

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• Thank You