CONSUMER SURPLUS

The paradox of value emphasizes that the recorded monetary value of a good (measured by price times
quantity) may be a misleading indicator of the total economic value of that good. 1be fulfillment economic value of the air we breathe is zero, yet air’s contribution to welfare is immeasurably large.

The gap between the total utility of a good and its total market value is called Counterrevolutions. The surplus arises because we “receive more than we pay for” as a result of the law of diminishing marginal utility.

We have consumer surplus basically because we pay the same amount for each unit of a commodity that we buy, from the first to the last. We pay the same price for each egg or glass of water. Thus we pay for mda unit what the last unit is worth. But by our fundamental law of diminishing marginal utility, the earlier units are worth more to us than the last, Thus, we enjoy a surplus of utility on each of these earlier units.

Figure 5.Q illustrates the concept of consumer surplus in the case where money provides a firm

CONSUMER SURPLUS

CONSUMER SURPLUS

FIGURE 5-‘. Because of Diminishing Marginal Utility.

Consumer’s SalisfllCtion Exceeds What Is Paid The downward-sloping demand for water reflects the diminishing marginal utility of water.Note how much excess or surphe satisfactionoccurs from the earlier units. Adding up all the gray surpluses ($8 of surplus on unit 1 + $7 of surplus on unit 2 + ..-+ 51 of surplus 011 unit 8), we obtain the total consumer surplus elf 36011 water purchases, In the simplified case seen here, the area between the demand curve and the price line il the total consumer surplus.

measuring rod for utility. Here, an individual consumes water, which has a price of $1 per gallon. This is shown by the horizontal bl-ie line at $1 in Figure 5.Q. The consumer considers how many gallon jugs to buy at that price. The first gallon is highly valuable,
slaking extreme thirst, and the consumer is willingto pay $9 for it. But this first gallon costs only the market price of 1, so the consumer has gained a surplus of 58.

Consider the second gallon. This is worth $8 to the consumer, but again costs only $1, so the surplus is $7. And so on down to the ninth gallon, which is worth only 50 cents to the consumer, and so it is not bought. The consumer equilibrium comes at point E. where 8 gallons of water are bought at a price of $1 each. But here we make an important discover-y: Even though the consumer has paid only $8, the total value of the water is S44. This is obtained by adding up each of the marginal utility columns (= $9 + $8-+ $2). Thus the consumer has gained a surplus of 36 over the amount paid.

Figure 5-6 examines the case of a single consumer purc~asing water. We can also apply the concept of .consumer surplus to a market as a whole. The market demand curve in Figure 5-7 is the horizontal summarion of the individual demand curves. The logic of the individual consumer surplus carries over to the market as a whole. The area of the market demand curve above the price line. shown as NER in Figure 5-7, represents the total consumer surplus. Because consumers pay the price of the last unit for all units consumed, they enjoy a surplus of utility over cost. Consumer surplus measures the extra value that consumers receive above what they pay for a commodity.

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