Concept of consumer surplus. Consumer Surplus Definition, Measurement, and Example 2022-12-15

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The concept of consumer surplus refers to the difference between the amount a consumer is willing to pay for a good or service and the amount they actually pay. It represents the additional benefit or satisfaction that a consumer derives from purchasing a product or service.

Consumer surplus is a key concept in economics, as it helps to understand the relationship between the demand for a good or service and its price. When the price of a good or service is lower than the maximum amount a consumer is willing to pay, they experience a consumer surplus. This surplus can be thought of as a measure of the value that a consumer derives from the good or service.

There are several factors that can affect the size of a consumer's surplus. One of the most significant factors is the elasticity of demand for the good or service. If the demand for a good or service is elastic, it means that consumers are sensitive to changes in price, and they may be willing to switch to a substitute if the price increases. In this case, the consumer surplus will be relatively large, as the price is lower than the maximum amount the consumer is willing to pay. On the other hand, if the demand for a good or service is inelastic, it means that consumers are less sensitive to changes in price, and they are willing to pay a higher price for the good or service. In this case, the consumer surplus will be relatively small.

Another factor that can affect the size of a consumer's surplus is the availability of substitutes for the good or service. If there are many substitutes available, it means that consumers have more options and are less likely to pay a high price for the good or service. In this case, the consumer surplus will be relatively large. On the other hand, if there are few substitutes available, it means that consumers have limited options and may be willing to pay a higher price for the good or service. In this case, the consumer surplus will be relatively small.

In addition to the factors mentioned above, the consumer surplus can also be affected by a variety of other factors, such as the consumer's income, the price of other goods and services, and the consumer's preferences and tastes.

Overall, the concept of consumer surplus is an important one, as it helps to understand the relationship between the demand for a good or service and its price, and it can help to inform decisions about pricing and marketing strategies.

Definition of Consumer Surplus

concept of consumer surplus

Hypothetical, Unreal and Imaginary: Prof. Suppose the market price is 25 paise per orange. Consumer surplus is a concept in economics. Now, with the imposition of sales tax of Rs. This is attained by drawing an indifference curve passing through M. S 1 is the new supply curve after levying the tax.

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Explain The Concept Of Consumer Surplus?

concept of consumer surplus

Monopoly producer should observe the psychology of consumer while determining the price of product. Thus when the slopes of indifference curves I 1 and I 2 at points Š” and A are equal, the assumption of constant MU of money is fulfilled. Conversely, if a situation is inefficient, it becomes possible to benefit at least one party without imposing costs on others. This concept largely depends on the measurability of utility. This assumption underĀ­mines the very validity of this concept.

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Consumerā€™s Surplus: Concept, Measurement and Limitations

concept of consumer surplus

It is impossible to know what prices the consumer is prepared to pay for every unit of the commodity. Surplus Exhausted: It is pointed out that if the consumer knew that any such thing existed, he would go on buying more and more till the surplus utility he enjoyed disappeared. ADVERTISEMENTS: But the cost of subsidy to the Government is R. If the actual price is greater than the reservation price of the producers then it is known as Producer surplus. Panel C shows the production of commodity under constant cost industry.


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Consumer & Producer Surplus

concept of consumer surplus

You might also like. The areas P 2 q 2 indicates the total market value of diamonds. People living in cities enjoy greater surplus in the form of entertainment and educational attainment than people living in rural areas. To the Monopolist: It is of practical importance to the monopolist in fixing the price of his commodity. Suppose the subsidy reduces the price of food-grains from Rs. On the other hand, as the actually available quantity of a commodity such as diaĀ­monds, gold etc. Such tax will bring more revenue to the state.


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The Consumers' Surplus (With Diagram)

concept of consumer surplus

For instance, electricity hasmany uses. The consumer surplus area is highlighted above the equilibrium price line. But after establishing trade relations we get it for Rs 25,000. The prices of necessarĀ­ies are very low whereas utility derived from them is very high. Importance of Consumer surplus is an extra amount which we feel as surplus of satisfaction.

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Uses and Applications of Consumer Surplus

concept of consumer surplus

Hicks attempts to rehabilitate it have failed to change the views of economists both in England and America. When they feel that consumers are ready to pay more they raise the price of goods and maximize their profit. It may be noted that Marshall assumed constant MU of money in his concept and to explain the Marshallian measure, Hicks assumed vertically parallel indifference curves. Both producers and consumers benefited. .

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Consumer Surplus: Meaning, Graphical Representation, Examples etc.

concept of consumer surplus

This difference is referred to as the consumer surplus. If the marginal utility of a good is greater than the price, then that is our consumer surplus. This indifference curve is flatter than I 1 for any given quantity of x, showing that the marginal utility of money changes inversely with the amount of money income. A Consumer does not pay more than the Actual Price: It has been pointed out by critics that since wants are unlimited and the means to satisfy them are limited a consumer cannot pay more than the actual price of the commodity. We assume that supply curve of cars is perfectly elastic, indicatĀ­ing constant cost conditions under which the car industry is working. It is also important to look above the market value of the commodity, which is represented by a horizontal line between the price section y-axis and the demand curve.

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Consumer Surplus Definition, Measurement, and Example

concept of consumer surplus

Producer surplus is the corporate producers receive more than its cost of production gains created by the enterprise workers. This is so because for this amount his marginal utility is equal to the price. If a good has no substitutes, the consumer has no option but to stickto the good in the event of price. The supply curve shows the quantity that firms are willing to supply at each price. Graphically, the consumer surplus may be found by using his demand curve for commodity x and the current market price, which is assumed not to be affected by his purchases of this commodity. Similarly, the utility of the second orange is equal to ISO, while the consumer pays 50P. International trade: This concept is best for international trade.

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Consumerā€™s Surplus: Meaning, Criticism and Importance of Consumerā€™s Surplus

concept of consumer surplus

They intersect at point A where at OP price, ON quantity of the commodity is bought. Thus,the equilibrium is at E 2. In such cases the surplus is immeasurable. But this terminological controversy in no way undermines the concept itself. But it brings revenue to the state. In such cases, the people would be willing to pay more than they actually pay at present.

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Explaining The Concept Of Consumer Surplus

concept of consumer surplus

It's the amount that a consumer benefits from in a transaction, in buying a good or service. But the total amount of money he is prepared to pay total utility for OQ units is OQRD. Suppose you have a product, a person wants to buy by paying incredible amount; however there are similar products in the market in fewer prices. The cost to produce that value is the area under the supply curve. In other words, the height of the demand curve at any quantity shows what some consumers think those tablets are worth.


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