consumer’s Surplus
Table of Contents
consumer’s Surplus
First of all, the concept of consumer’s savings was initially presented by the French economist Dupit,
but later Marshall presented it scientifically and completely and named it “consumer’s savings”.
Meaning of Consumer’s Surplus –
Consumer’s perception of savings is based on our daily life experiences. When we want to buy an item.
So in our view, that thing has some utility and we are ready to pay a price for that thing equal to its utility, but due to some reasons,
that thing is available at a price lower than the price we had considered, then we Some benefits are experienced.
We call this profit as consumer’s saving, that is, consumer’s saving is the difference between the expected price of the product and the actual price.
Definitions of consumer’s Surplus:-
Various economists have given definitions of consumer saving as follows:-
(1) According to Pension:-
“The difference between what we are willing to pay and what we actually pay is called consumer savings.”
(2) According to Marshall :-
“The difference between the price a consumer is willing to pay for a good and the price he actually pays,
rather than being deprived of its consumption, is the measure of that surplus (savings) satisfaction.
This is called consumer saving. “
On the basis of the above definitions, we can say that
“the difference between the total utility obtained from a good and the total utility of the money spent to obtain that good is called the consumer’s savings.”
Formula –
Consumer Savings =
The price the consumer is willing to pay (-) versus the price he actually pays.
Or
Consumer Savings = Total Utility Value (-) Total Exchange Value
Reasons of Creation of Consumers Surplus –
Consumer savings arise due to the following reasons:-
(1) Satisfaction obtained from consumption of initial units of a commodity:-
When a consumer consumes some units of a commodity,
he gets more satisfaction from the consumption of the initial units of that commodity than from the consumption of subsequent units.
But the same price has to be paid for all units of the commodity.
Therefore, the economic measure of the additional satisfaction he gets from the consumption of initial units of the commodity is called the consumer’s savings.
(2) Stopping consumption when a unit of a good gives less satisfaction than its price:-
Consumer
One stops using a good after the number of units in which the satisfaction obtained from its use becomes equal to the price paid for it;
he does not buy further units because he will suffer loss of satisfaction.
(3) The price of each unit of the commodity should be the same: –
The consumer has to pay the same price for each unit of the commodity.
Because the price of each unit is the same in the market.
The price of a commodity is equal to its marginal satisfaction.
Therefore, the more satisfaction obtained from the consumption of the previous units than the marginal satisfaction is called the consumer’s savings.
(4) Apart from the marginal unit of the commodity, the hedonic quality of all other units is higher: –
The hedonic quality obtained by the consumer from other units of a commodity consumed is more than the hedonic quality obtained from the consumption of the last unit of that commodity.
Therefore, the more satisfaction obtained by consumption of additional units of the last unit is called saving of the consumer.
Measurement of Consumer’s Surplus
The amount of utility a consumer gets from consuming a good cannot be measured because utility is a psychological concept.
But Prof. Marshall’s idea is that consumer savings can be measured with the help of money.
The following two formulas can be used to measure consumer savings: –
(1) On the basis of utility,
(2) On the basis of value,
(1) On the basis of utility:-
Economists have used the following formula to measure consumer savings on the basis of utility-
Consumer Savings = Total Utility
(-) [Marginal Utility(×) Units of the] commodity)
CS = TU (MU x N)
= 400-(25 x 6)
= 400-150
= 250
This can also be expressed in another way:-
Consumer’s savings = (realization of total utility)
(-) (Sacrifice of entire utility)
Thus the saving of the consumer will be Rs 250.
(2) On the basis of price :-
Consumer savings can be measured on price basis as follows:-
consumer savings =(willing to pay total price)(-) [price given for the last unit(×) total units of the item]
CS=X-(P × Q)
Here :-
CS = Consumer Savings
X = Consumer willing to spend.
P = price per unit of the product
Q = quantity of the item
PQ = total expenditure.
Difficulties in the Measurement of Consumers Surplus
The following difficulties arise in measuring consumer savings:-
(1) Numerical measurement of utility is not possible.
(2) Marginal utility of money does not remain constant.
(3) There is difference in consumer’s interest, income etc.
(4) Presence of substitute goods.
(5) Consumer savings do not apply to life saving items.
(6) The consumer does not have knowledge of the demand schedule.
(7) Only measurement of savings of the average consumer is possible.
(8) Consumer’s perception of saving is changeable.
(1) Numerical measurement of utility is not possible:-
Prof. Marshall’s assumption that utility can be measured numerically is incorrect.
Because utility is a personal and psychological concept, which cannot be measured.
When utility is unmeasurable then consumer’s savings based on it also cannot be measured.
(2) Marginal utility of money does not remain constant:-
The marginal utility of money does not remain constant.
The utility of final units of currency increases as money is spent.
The concept of saving of consumer H assumes marginal utility as constant.
Therefore, it is difficult to measure consumer savings.
(3) There is difference in consumer’s interest, income etc.:-
Consumer’s interest And difference is found in income, habits, etc.
As a result, different goods provide different utility.
Due to this it becomes difficult to measure consumer savings.
(4)Presence of substitute goods : –
Due to the presence of substitute goods, the utility derived from a product varies for different consumers,
hence it becomes difficult to measure.
(5) Consumer savings do not apply to life saving items:-
It is difficult to measure the amount of consumer savings that result from the consumption of life-saving items.
For example, a rich person suffering from thirst in the desert may be ready to pay lakhs of rupees for a glass of water because at this time only a glass of water can save his life.
Therefore, it is said that consumer savings from life saving necessities are achieved in unlimited quantities.
Which is not easily possible to measure.
(6) Consumer does not have knowledge of demand schedule:-
One difficulty in accurately measuring consumer savings is that the consumer lacks a complete list of demand prices.
He himself does not know what price he is willing to pay for each unit.
Because that price is not prevalent in the market.
In this way, the demand lists prepared at different prices are imaginary.
Therefore, consumer savings based on these lists are also uncertain.
(7) Only measurement of savings of the average consumer is possible:-
Consumer savings cannot be estimated accurately.
The main reason for this is that different consumers get different utility from one product.
Therefore, they get the savings of individual consumers,
due to which the consumer savings of the society cannot be estimated accurately,
only the average savings can be found out.
(8) Consumer’s perception of saving is changeable :-
The measure of consumer’s savings depends on the price of the product.
It decreases when the price of a commodity increases, and increases when its price decreases,
hence the consumer’s savings are not permanent but variable,
because the prices of commodities do not remain constant but keep changing.
Despite the above criticisms, consumer savings are not unimportant but have more practical importance.
Importance of Consumers Surplus
The concept of consumer savings is important from theoretical and practical point of view in economics: –
(1) Theoretical Significance:
1. Difference between use value and exchange value.
2. Explanation of importance of social life.
(2) Practical importance:-
1. Assistance in comparison to economic level.
2. Monopoly pricing.
3. Helpful in tax assessment and providing financial assistance.
4. Assistance to industries by the government.
5. Helpful in measuring the benefits of international trade.
( consumer’s Surplus )
(1) Theoretical Significance :-
Theoretical importance of consumer savings
Can be divided into two parts-
1.Difference between use value and exchange value :-
The idea of consumer saving explains the difference between use value and exchange value.
In daily life we find many things which have very high utility value,
but to get them one has to pay very little price.
For example, matches, newspapers, postcards, salt etc. are such items for which the consumer is ready to pay more.
This is because their usefulness is very high,
but to get these things, the exchange price has to be paid very low.
Therefore, the consumer gets huge savings from such items.
2.Explanation of importance of social life :-
The idea of consumer savings also explains the importance of social life.
Match boxes, postcards, newspapers, telephones etc.
have an important place in social life. Using it increases consumer savings.
(2) Practical importance :-
Following are the practical importance of consumer savings –
1. Assistance in comparison to economic level:-
With the help of consumer savings, the economic conditions of people living in two places can be compared and
it can be told that the standard of living of the residents of which country is high and whose standard of living is low.
Generally, the standard of living of the residents of the country where consumers get more savings is high and on the contrary,
the standard of living of the people of those countries which get less consumer savings is low.
The reason for this is that consumer savings will accrue more to the people of the country where the prices of goods are relatively cheaper.
2. In monopoly pricing :-
The objective of a monopolist is to maximize its profits.
As a result, the monopolist can fix the maximum price for his product to the extent that the consumer is ready to pay that price so as not to be deprived of the consumption of the product.
If the monopolist increases the price of his product more than the consumer’s savings,
then the demand for his product will reduce drastically.
As a result the monopolist will not be able to get maximum profit.
Therefore, the monopolist sets the price of his product slightly less than the maximum limit of consumer savings.
3. Assistant in tax assessment and providing financial assistance: –
The Finance Minister gets a lot of help from the perception of consumer savings while imposing taxes on goods.
The government can collect more taxes from those goods which provide more consumer savings to the consumer.
The reason for this is that by increasing the tax on such goods, people will not feel the burden of tax.
On the contrary, it is considered appropriate to impose less tax on those goods which provide less savings to the consumer.
4. Assistance to industries by government:-
The government provides financial assistance to those whose production leads to greater consumer savings.
When the government gives financial assistance to an industry, it suffers loss, but the value of the goods manufactured by the industry decreases due to receiving financial assistance.
The savings that consumers receive from this not only compensate for the loss, but even exceed it.
5. Helpful in measuring the benefits of international trade:-
Under international trade, a country imports such goods from other countries, which are expensive in its own country and cheap in another country.
If these goods are not imported from abroad, then the consumers of the country will have to pay more for the indigenous goods,
but by importing the goods from abroad, they have to pay less price,
hence the price paid by the consumer for the goods before import.
Price has to be paid and the price that has to be paid after import,
The difference between these two prices is the savings the consumer receives from international trade.
The greater this saving, the greater will be the benefit derived from international trade.
( consumer’s Surplus )
Energy resources renewable and nonrenewable
( consumer’s Surplus )
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