Consumer’s Surplus and the Law of Diminishing Marginal Utility

The concept of consumer’s surplus may be derived from the law of diminishing utility. The idea will be dear from the table given below.

The figures in the following table arc merely illustrative representations of the amount of utility. Any other figures may be taken. provided variations in the amount of utility are’ similar to those in the table given below, e.g., the additional utility at every step should be diminishing.)

1. For later refinements in the concept of Consumer’s Surplus, reference may be made to Hick’s article on .The Generalized Theory of Consumer’s Surplus in the Review.

2 Hicks, J. R. -A Revision of Demand Theory, 1959, p. 95.

Suppose the price in the market is 6 Paise per toast. The consumer will purchase as many toasts as make his marginal utility equal to the price. Thus he will purchase 5 toasts and pay for each six Paise (one unit of utility is supposed to be one Paise worth). In this way, he will spend in all 30 Paise. But the total utility of 5 toasts is measured by 70 paise. He thus gains a consumer’s surplus measured by 40 (70-30) Paise. This is so because he would have paid 70 Paise rather than go without the toasts, but he actually pays only 30 Paise. If the price rises to II Paise, he will purchase 4 toasts only and pay 44 Paise, whereas the total utility is worth 64 Paise. This will give a consumer’s surplus measured by 20 (64-44) Paise. and so on.