Consumer Surplus
Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually have to pay. It represents the benefit or value that consumers receive from making a purchase at a price lower than their maximum willingness to pay. Consumer surplus is a key concept in understanding consumer behavior and welfare economics.
7 Key excerpts on "Consumer Surplus"
eBook - ePubPricing on Purpose
Creating and Capturing Value
- Ronald J. Baker(Author)
- 2010(Publication Date)
- Wiley(Publisher)
...While the Consumer Surplus is the gain the buyer receives from trade, the producer surplus is sometimes referred to as economic rent —the amount received by sellers of an item over and above what they would have accepted. Michael Jordan and Tiger Woods receive an enormous amount of economic rent above what would be needed to induce them to play their favorite sport. There is also a consumer detriment, representing the customers who are willing to pay more than cost but less than the market price. While Consumer Surplus makes customers happy, it is economic rent that makes companies—and individuals—rich. In fact, because of this fact, some economists believe Marshall should have called his scissors “sales curves” and “bid curves” rather than supply and demand curves, since what they are really depicting is the highest price an individual would be willing to pay, or the lowest a seller would accept, for a given amount of product. If a business can identify those customers willing and able to pay more, it can capture a portion of this Consumer Surplus. It is there for any company with a downward sloping demand curve, which is present even for the most elastic demand curves. What if the bookstore owner had known me, and my quest to find the rare Stanley Marcus book? Perhaps with the sophisticated customer relationship management (CRM) software of today he could track the desires of his customers and this would certainly assist him in pricing to capture a larger share of the Consumer Surplus. Yet, identifying these particular customers is only part of the puzzle, however, since then you have to charge different prices to different customers, and this presents some challenges, although not insurmountable. Charging different prices to different customers is the definition of price discrimination, a term coined in 1920 by Arthur Cecil Pigou in The Economics of Welfare...
eBook - ePub- Bonnie Nguyen, Andrew Wait(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...That is, Consumer Surplus is given by the consumer’s willingness to pay, minus the price actually paid, for each unit bought. To provide some intuition for this, suppose Hamish is considering buying a chocolate bar. His willingness to pay (or marginal benefit) for the chocolate bar is $5.50, but the price of chocolate bars is $2. If he buys the chocolate bar, he will receive $5.50 of benefits, minus the price actually paid of $2. Therefore, his surplus from buying the chocolate bar is $3.50. However, Consumer Surplus in the market takes into account every unit of the good or service purchased. Therefore, if Hamish buys multiple chocolate bars, we would need to add up the surplus from each chocolate bar in order to get his total Consumer Surplus. Recalling that the individual demand curve traces out a consumer’s marginal benefit or willingness to pay, we can find an individual’s CS by calculating the area between the individual demand curve and the price line. Similarly, we can find the CS of all consumers in the market by calculating the area between the market demand curve and the price line. This area is shown in Figure 9.6. Figure 9.6 The area of Consumer Surplus in this market is denoted by the shaded area What happens when price falls? Consider Figure 9.7, in which the market price falls from P 1 to P 2. As you can see, the area of Consumer Surplus has now increased, due to two additional benefits: on all the units previously consumed, the difference between MB and price is now larger, meaning that the net benefit from consuming each of these units has increased; secondly, the lower price now means that more units are purchased, which also generates an additional benefit to consumers. Figure 9.7 When the market price falls from p1 to p 2, the area of Consumer Surplus increases from A to A + B + C. The area B represents the increase in Consumer Surplus that arises from an increase in the net benefit of previously consumed units...
eBook - ePub- E.J. Mishan, Euston Quah(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...Part II Basic concepts of benefits and costs 4 Measurements of Consumer Surplus 1 Notwithstanding some ill-considered judgements about the uses of Consumer Surplus by some highly regarded economists some three score years ago, 1, 2 it is a concept so crucial to allocative economics generally, and CBA in particular, that there is everything to be said for clarifying the concept itself and the ways it can be measured. Thus, if a man is willing to pay as much as $25 for a litre of cider, the economist has to concede that it is worth no less to him than $25. If, however, he buys that litre at $15, he is obviously better off than if he had indeed to pay the $25 that he is willing to pay. And it makes sense to say that, when he buys the litre of cider at $15, which is $10 less than the $25 he is willing to pay, he makes a saving of $10 which may properly be regarded as a measure of his gain – that is, of his Consumer Surplus. Again, if we now suppose that, at the price of $15, the man buys 10 litres of cider each month, and the price is then lowered to $10 a litre, there is a cost-saving of $5 on each of the 10 litres he habitually bought. Thus, in the limiting case in which he continues to buy only 10 litres at the lower price, he will find himself with an additional sum of $50 (10 × $5) each month, which he can spend on other goods. Such an example alone is enough to vindicate the concept of Consumer Surplus. There can, however, be arguments about how exactly to measure it. 2 Let us put these arguments aside for the present and adopt in this and the following two chapters a simple common-sense definition of Consumer Surplus, traceable to the French engineer Dupuit (1844): the Consumer Surplus of a person is measured by the most he would pay for a thing less the amount he actually pays for it. Let us now consider a single person’s demand curve for a good x...
eBook - ePubCost-Benefit Analysis
Financial And Economic Appraisal Using Spreadsheets
- Harry F. Campbell, Richard P.C. Brown(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...For example, suppose that the price of a good or service falls, as in the case of the rental price of unfavourably located apartments in the bridge example discussed above. Buyers of the service (renters) are better off, but suppliers (landlords) are worse off to the same extent. The gain to buyers and the loss to sellers are termed pecuniary effects and they have the characteristic that they net out in an Efficiency Analysis. Because pecuniary effects measure changes in entitlement to an existing flow of goods and services, they are referred to as transfers – they transfer a portion of existing benefits or costs from one group to another. While they are not relevant in the aggregate Efficiency Analysis, they may, as we saw in Chapter 6, need to be accounted for in the Referent Group Analysis which is concerned with the benefits and costs of the project to a subset of agents in the world economy. 7.3 Consumer Surplus A surplus is generated when a consumer is able to buy a unit of a good at a price lower than her willingness to pay for that unit, or when a producer is able to sell a unit of a good or factor of production at a price higher than that at which he would willingly part with that unit. The concept of Consumer Surplus can be explained by means of Figure 7.1, which illustrates an individual consumer’s demand for a recreational service measured by number of trips per annum: according to the diagram, the consumer is willing to pay OE dollars for the first visit she makes, and lower amounts, as measured by the demand curve, for subsequent visits until she is just willing to pay the current price, P 0, and no more, for the last visit she makes. The reason the consumer is not willing to purchase more than Q 0 units (visits) at that price is that additional units are worth less to her, as measured by the height of her demand curve, than the current price, P 0...
eBook - ePub- Enrico Colombatto(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...When the central bank takes advantage of its power and lends money at rates far below those that private creditors would propose, consumers compare their rate of time preference with the interest rate offered by or through the central bank, and they increase their borrowing and their current consumption. Unfortunately, once these consumers find out that easy borrowing has not actually increased the amount of consumption goods available and that debts must be paid back at a relatively high cost – i.e., that the opportunity cost is actually higher than the interest rate offered by the central bank – the euphoria turns into a crash. The lesson, clearly, is that people make mistakes that can usually be fixed with relative ease as long as they are not systematic, but when the mistakes are induced by external agents, they can be systematic and of magnitudes sufficient to transform individual mismatches – differences between their plans and reality – into a general crisis. 2.8 From the demand curve to the consumer's surplus As we have mentioned, demand curves are not very useful if one is looking for truthful representations of the real world. Yet, they help to shed light on more complex phenomena. The previous sections dealt with intertemporal choices and the interest rate. This section delves into another complex phenomenon that the demand curve can help us understand: the notion of surplus. Earlier on, we defined the surplus as the amount of benefits one gets as a result of an activity, after all the costs/sacrifices have been discounted. Thus, in the realm of consumption analysis, the surplus is the amount of satisfaction (or happiness) one obtains from those transactions aiming at acquiring consumer goods. But as we know, the notion of satisfaction is subjective and, therefore, the notion of consumer's surplus is also subjective, so that it is hard to obtain objective measures...
eBook - ePubEconomic Efficiency and Social Welfare (Routledge Revivals)
Selected Essays on Fundamental Aspects of the Economic Theory of Social Welfare
- E. Mishan(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...The division of the welfare gain from free trade into gains (or losses) of consumer’s surpluses offset by losses (or gains) of producer’s surpluses is, therefore, quite arbitrary. Indeed, if producer’s surplus is defined as to be coterminous with pure profit 16 then it is in any case zero for all (long period) equilibrium positions, whether in autarky or free trade, for a perfectly competitive economy. 17 It appears then that the attempt to separate a consumer’s surplus from a producer’s surplus in the construction of Figure (a), or from its derived construction Figure (b), is arbitrary and erroneous. It must be recognized that we have constructed two Pareto-comparable community indifference curves, I 0 I 0 and I 1 I 1 in Figure (a), passing through the consumption batches in the autarkic and free trade situations respectively. And the welfare gain is no more than the difference between them measured here as a single compensating variation at the new international price ratio - as SV along the x -axis or as S’V’ along the y -axis. 18 Either can be interpreted as an exact measure of the gains for the community as a whole, or for a single person, in moving from the consumption possibilities presented by TT’ to the new consumption possibilities presented by VV’. Notes: Chapter 8 I wish to record my indebtedness to D. M. Winch for many valuable comments on a first draft of this paper. 1 With commendable analytic finesse Marshall separates the rising supply curve resulting from differential advantages as between firms, ‘the particular expenses curve’, from the possible external economies which may predominate and act, therefore, to lower the unit cost as the total output of industry is increased. The contribution of external economies are taken as fixed at the equilibrium output, OH, of his figure 39 [11, p. 811]. This procedure is correct inasmuch as the area measures what the total number of firms take to be their rents or producer’s surpluses...
eBook - ePub- Lynne Lewis, Thomas Tietenberg(Authors)
- 2019(Publication Date)
- Routledge(Publisher)
...Producer surplus = $800. Consumer Surplus plus producer surplus = $1,600 = economic surplus. c The marginal revenue curve has twice the slope of the demand curve, so MR = 80 – 2 q. Setting MR = MC, yields q = 80/3 and P = 160/3. Using Figure 2.8, producer surplus is the area under the price line (FE) and over the marginal-cost line (DH). This can be computed as the sum of a rectangle (formed by FED and a horizontal line drawn from D to the vertical axis) and a triangle (formed by DH and the point created by the intersection of the horizontal line drawn from D with the vertical axis). The area of any rectangle is base ´ height. The base = 80/3 and the Height = P − M C = 160 3 − 80 3 = 80 3. Therefore, the area of the rectangle is 6400/9. The area of the right triangle is 1 2 × 80 3 × 80 3 = 3, 200 9. Producer surplus = 3, 200 9 + 6, 400 9 = $ 9, 600 9 Consumer surplus = 1 2 × 80 3 × 80 3 = $ 3, 200 9 $ 9, 600 9 > $ 800 $ 3, 200 9 < $ 800 $ 12, 800 9 < $ 1, 600 The policy would not be consistent with efficiency. As the firm considers measures to reduce the magnitude of any spill, it would compare the marginal costs of those measures with the expected marginal reduction in its liability from reducing the magnitude of the spill. Yet the expected marginal reduction in liability from a smaller spill would be zero. Firms would pay $X regardless of the size of the spill. Since the amount paid cannot be reduced by controlling the size of the spill, the incentive to take precautions that reduce the size of the spill will be inefficiently low. If “better” means efficient, this common belief is not necessarily true. Damage awards are efficient when they equal the damage caused. Ensuring that the award reflects the actual damage will appropriately internalize the external cost. Larger damage awards are more efficient only to the extent that they more closely approximate the actual damage...
