Consumer Surplus Formula

11 Key excerpts on "Consumer Surplus Formula"

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  Profit Maximization (Ultimate Goal of Business)

  • (Author)
  • 2014(Publication Date)
  • Orange Apple

    (Publisher)

  In some schools of heterodox economics, the economic surplus denotes the total income which the ruling class derives from its ownership of scarce factors of production, which is either reinvested or spent on consumption. In Marxian economics, the term surplus may also refer to surplus value, surplus product and surplus labour. Consumer surplus Consumer surplus is the difference between the maximum price a consumer is willing to pay and the actual price they do pay. If a consumer would be willing to pay more than the current asking price, then they are getting more benefit from the purchased product than they spent to buy it. An example of a good with generally high consumer surplus is drinking water. People would pay very high prices for drinking water, as they need it to survive. The difference in the price that they would pay, if they had to, and the amount that they pay now is their consumer surplus. Note that the utility of the first few liters of drinking water is very high (as it prevents death), so the first few liters would likely have more consumer surplus than subsequent liters. The maximum price a consumer would be willing to pay for a given amount is the sum of the maximum price he would be willing to pay for the first unit, the maximum additional price he would be willing to pay for the second unit, etc. Typically these prices are decreasing; in that case they are given by the individual demand curve. If these prices are first increasing and then decreasing there may be a non-zero amount with zero consumer surplus. The consumer would not buy an amount larger than zero and smaller than this amount because the consumer surplus would be negative. The maximum additional price a consumer would be willing to pay for each additional unit may also alternatingly be high and low, e.g. if he wants an even number of units, such as in the case of tickets he uses in pairs on dates.

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  Welfare Economics

  Towards a More Complete Analysis

  • Y. Ng(Author)
  • 2003(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  4 The Magnitude of Welfare Change: Consumer Surplus The discussion of the magnitude of welfare change in this chapter centres on the concept of consumer surplus associated with a price change. But some of the measures of consumer surplus – such as compensating variation, equivalent variation and our proposed measure, marginal-dollar equivalent (see the appendix to this chapter) – can also be used to measure welfare changes that are associated with other changes. The concept of consumer surplus has given rise to a great deal of debate and confusion. While it has been regarded as superfluous, or at least the theoretical foundation of using consumer surplus as a measure of welfare change is usually regarded as suspect, its use in cost–benefit analyses and policy discussions has been widespread. This chapter reviews the various measures of consumer surplus and discusses some complications, before justifying its use as an approximate measure. 4.1 The origin of the concept: Dupuit and Marshall The concept of consumer surplus was formulated in about 1850 by the French engineer J. Dupuit, who was concerned with the question as to the amount of worthwhile subsidy towards the cost of constructing a bridge. He was clearly aware of the fact that consumers are usually willing to pay more for a good than they actually pay. Hence the consumer obtains an ‘excess satisfaction’, or a surplus. The concept of consumer surplus gained prominence after the publication of Marshall’s Principles of Economics. Marshall was the first to introduce the concept to the English-speaking world, but it is said that he was less than generous in acknowledging Dupuit’s priority (see Pfouts, 1953, p. 316). Marshall (1920, p. 124) defined consumer surplus as ‘the excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay’.

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  Microeconomic Foundations I

  Choice and Competitive Markets

  • David M. Kreps(Author)
  • 2012(Publication Date)
  • Princeton University Press

    (Publisher)

  Chapter Twelve

  Producer and Consumer Surplus

  Most courses in microeconomics at some point engage in policy evaluation: What happens if the government taxes or subsidizes the sale of some good? What happens if a price ceiling or a price floor is established? What if imports into a particular domestic market are capped at some level?

  The discussion of “what happens?” can begin and end with an analysis of changes in prices and quantities. But when it comes to evaluation, one typically seeks dollar-denominated measures of the impact such policies have on firms inside the industry and on consumers of the specific product. The concepts of producer and consumer surplus appear at this point; the former is advanced as a dollar-denominated measure of the impact the policy has on producers; the latter is asserted to be a dollar-denominated measure of its impact on consumers. These concepts are defined graphically, by pictures such as Figures 12.1a and b . In this chapter, we explore the foundations of these two concepts.

  Figure 12.1. Producer and consumer surplus. Intermediate-level textbooks in microeconomics often have the pictures shown here, accompanied by text such as “The shaded region in panel a is producer surplus, a dollar-denominated measure of the value producers obtain from this market. The shaded region in panel b is consumer surplus, a dollar-denominated measure of the value obtained by consumers.” The objective of this chapter is to make these notions as precise as we can.

  12.1.   Producer Surplus

  Producer surplus has a relatively simple story, although one with a hidden trap. The story concerns the market for a particular good supplied by a number F of firms. We assume that the firms are all competitive, engaged in profit maximization in the sense and style of Chapter 9 ; Zf will denote the production-possibility set of firm f. We let p ∈ be the vector of all prices, and we will suppose that coordinate indices have been chosen so that i

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  Macroeconomics for Today

  • Irvin B. Tucker, Irvin Tucker(Authors)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  KEY CONCEPTS Consumer surplus Producer surplus Deadweight loss SUMMARY • Consumer surplus measures the value between the price consumers are willing to pay for a prod-uct along the demand curve and the price they actually pay. • Producer surplus measures the value between the actual selling price of a product and the price along the supply curve at which sellers are willing to sell the product. Total surplus is the sum of consumer surplus and producer surplus. • Deadweight loss is the result of a market that operates in disequilibrium. It is the net loss of both consumer and producer surplus resulting from underproduction or overproduction of a product. SUMMARY OF CONCLUSION STATEMENTS • Total consumer surplus measured in dollars is represented by the total area under the market demand curve and above the equilibrium price. • Total producer surplus measured in dollars is represented by the total area under the equilib-rium price and above the supply curve. • The total dollar value of potential benefits not achieved is the deadweight loss resulting from too few or too many resources used in a given market. APPENDIX TO CHAPTER 3 | Consumer Surplus, Producer Surplus, and Market Efficiency 95 Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ............................................................................................................................................................................................................................................. STUDY QUESTIONS AND PROBLEMS 1. Consider the market for used textbooks.

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  Principles of Cost-Benefit Analysis for Developing Countries

  • Caroline L. Dinwiddy, Francis J. Teal(Authors)
  • 1996(Publication Date)
  • Cambridge University Press

    (Publisher)

  It may be useful to notice here that with labour as the only variable factor of production, producer surplus, defined as the difference between total revenue and total variable cost, can also be identified in the factor market. Infigure2.7, total revenue is given by the area below the marginal revenue product curve; subtracting the wage payments (which, as noted above, constitute total variable cost) will leave the area below the factor demand curve and above the wage paid as an alternative representation of producer surplus. 2.5 Conclusion Measuring changes in welfare by adding together changes in consumer and producer surpluses implies that welfare is a function of both price and Consumers and producers: basic theory 37 income. This chapter has examined in greater detail the concepts of consumer and producer surplus underlying the analysis of chapter 1. It was shown that unless compensated demand curves are used, changes in consumer surplus following a change in the price of a commodity typically include income as well as price effects. Even if compensated demand curves are used, there is likely to be a discrepancy between the social value of a price change evaluated using the measure based on compensating variation (CV) and the measure based on equivalent variation (EV). The concept of producer surplus was shown to be essentially a measure of income, consisting of the return (quasi-rent) to any fixed factors in the short run and any element of pure profit arising from decreasing returns to scale. Both consumer and producer surplus are partial equilibrium tools of analysis measuring the consequences of a price change in one market at a time. However, a drop in the price of one commodity will typically reduce the demand for substitute goods and increase the demand for complemen- tary goods. An increase in income can lead to a shift in the demand for any good which has a non-zero income elasticity of demand.

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  Introduction to Political Economy (Routledge Revivals)

  • E. Mishan, E. J. Mishan(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  market demand curves only. It is practically impossible to estimate demand curves, and therefore the relevant consumer surpluses, of single individuals.

  Fortunately, it is the consumer surplus for the market, for society in effect, that the normative economist is trying to capture. Therefore estimates of the market demand curves for particular goods will admirably serve his purpose – which is not to say that there are not statistical difficulties in estimating many such demand curves owing to the paucity of data.

  After this somewhat leisurely exposition, we can begin to romp along at a brisker pace. Figure 8 shows a market demand curve DD in which the price has fallen from P2 , say $10 per unit x, at which price the amount OQ2 was bought, to Pl , say $8 per unit, at which price the amount OQ1 is bought. A fall in the price of x by $2 implies an increase in the welfare of buyers of x; at least, it does so if no other goods prices rise, which we may assume in a partial context. The measure of the gain in social welfare from this fall in price is the consumer surplus as measured by the shaded area between the two horizontal price-lines from P2 and P1 respectively.

  If this is not evident at first, look at it thus: if the price P2 were first established where previously the good x had been unobtainable, the improvement would have been measured as a consumer surplus equal to the triangular area DP2 E. If, instead, the lower price P1 had first been established, the improvement would have been a larger consumer surplus, one equal to the larger triangular area DP1 G. It follows that the difference to consumers of x from having the lower market price P1 rather than P2 is the difference between the two triangular areas, a difference that is measured by the shaded horizontal strip P2 P1 GE. This latter area then is the consumer surplus for a fall in price from P2 to P1 .

  Figure 8

  Perhaps you would like to look at it another way, more intuitively obvious to some. The rectangular part of the shaded area P2 P1 FE is the price difference on the original amount of x, OQ2 , bought when the price was P2 . Were consumers restricted to buying this same amount OQ2 of x (even though the price had fallen to P1 ) they would have saved just that much money. For this shaded rectangle P2 P1 FE is equal to the price difference (P2 – P1 ) times OQ2 of x. Thus this area measures the most consumers would pay for this fall in price provided they were allowed to buy no more than OQ2 , this being the amount of x they bought at the old price P2

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  Economics For Dummies

  Book + Chapter Quizzes Online

  • Sean Masaki Flynn(Author)
  • 2023(Publication Date)
  • For Dummies

    (Publisher)

  less than the $5 per gallon market price. You can see this by the fact that the supply curve lies below the horizontal price line up to the very last drop of the 1,000th gallon. The fact that they receive $5 per gallon for all of it despite being willing to produce it for less is the source of the producer surplus, which is represented by the area of the shaded triangle.

  Using the formula for the area of a triangle ( ), you can compute that the producer surplus in this example is $2,000. Producers are $2,000 better off after selling the 1,000 gallons of oil because the total cash they get from selling the 1,000 gallons is $2,000 greater than the minimum amount that they’d have been willing to accept to produce those units.

  Computing total surplus

  The total surplus that society receives from producing the socially optimal level of output of a certain good or service is simply the sum of the consumer surplus and producer surplus generated by that output level.

  Figure 7-6 illustrates total surplus for a market in which the equilibrium price and quantity are, respectively, and . (If this graph looks familiar, that’s because it’s just like Figure 7-1 .)

  © John Wiley & Sons, Inc.

  FIGURE 7-6: Total surplus is the sum of consumer surplus and producer surplus.

  I’ve drawn the total surplus area so you can clearly see that it’s made up of consumer surplus (the vertically striped area) plus producer surplus (the diagonally striped area). The two are separated by the horizontal line extending from the market equilibrium price ($5).

  By again using the formula for the area of a triangle, you multiply to figure out that for this graph the total surplus is $16. The total gain to society of producing at this output level is $16.

  Contemplating total surplus

  Total surplus is important because it puts a number on the gains that come from production and trade. Firms make things to generate a profit. People spend money on products because consuming those products makes them happy. And total surplus tells you just how much better off both consumers and producers are after interacting with each other.

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  Food and Agriculture Policy: Understanding the Decision Making Process for Agricultural Policy

  • Nekesah T. Wafullah(Author)
  • 2020(Publication Date)
  • Society Publishing

    (Publisher)

  It is then fair to question if the concepts of consumer and producer surpluses can still be used as the areas between the function of demand or price, and between value and marginal price as valid welfare reform measures. It turns out that under some restrictive assumptions, it is still legitimate to do so. Based on the assumption that all consumers are identical, a valid monetary measure of the sum of the utility of individuals is the area below the market demand function and above the price level. Generally speaking, we should remember that direct usefulness comparison is not legitimate, since usefulness is just an ordinary measure. Simply summarizing the surpluses of the individual consumer, as we implicitly do when we measure the aggregate consumer surplus as the area below market demand, we neglect the possibility that consumers may be different and that, for example, the same reduction in income may be more onerous for poor consumers than for rich consumers. In other words, we neglect potential equity issues by only measuring the aggregate consumer surplus. Things are less troublesome for the aggregate supply function: if the manufacturing sector is efficient, the aggregate supply is essentially the horizontal sum of the individual supply functions, even if companies vary in the nature of their marginal costs. Nonetheless, another subject that deserves consideration is the difference between income and returns to fixed production factors, or what we can call rentals. In the long run, there will be Food and Agriculture Policy: Understanding the Decision Making Process for Agricultural Policy 62 no profits for a competitive industry, and the whole area above the marginal cost curve is merely rents representing returns to the fixed factors.

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  The Economics Companion

  • Graham Mallard(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  The general rule for calculating consumer surplus (CS), then, is given as Equation B7.2.1, in which Q* d is the quantity bought and sold in the market, ‘equation’ is the expression for the market demand curve, and P* is the market price. Please note: it’s important to use the inverse market demand curve equation if integrating with respect to the quantity bought and sold. Alterna-tively, you can use the equation for the normal market demand curve but you will need to integrate with respect to the market price. CS = ∫ Q d =0 Q d =Q d * (equation)dQ d −(P * Q d * ) (Equation B7.2.1) Again, having a linear curve dramatically simplifies this calculation as it means consumer surplus is a triangle. Example : Consider again the market for fine port in Box 7.1. The normal market demand curve is given by Q d = 3050 – 25P and the market-clearing price and quantity are £110 and 300 bottles, respectively. We can derive the equation for the inverse market demand curve by rearranging that for the normal curve, mak-ing price a function of quantity demanded: Q d = 3050 − 25P → 25P = 3050 − Q d → P = 122 − 0.04Q d (Equation B7.2.2) This market demand curve is illustrated in Figure B7.2, along with the area repre-senting consumer surplus. Integrating this equation with respect to quantity demanded between quanti-ties of zero and 300 bottles gives us the total area under the curve up to and including the 300 th bottle of port. The initial integral is given as Equation B7.2.3 and its solution is given in Equation B7.2.5. This represents the total utility (TU) enjoyed by consumers from consuming these bottles of port. TU = ∫ Q d =0 Q d =300 ( 122−0.04 Q d ) d Q d = 122 Q d −0.04 Q d 2 __ 2 (Equation B7.2.3) Total market welfare is consumer surplus plus producer surplus.

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  Lionel Robbins on the Principles of Economic Analysis

  • Lionel Robbins, Susan Howson(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  The area behind the market demand curve no more expresses sur-plus utility to the community than the curve itself expresses marginal degrees of utility. We have to split the demand curve up into its component parts before the analysis is ever complete. Y O X D 1 D 2 D M D 3 Consumer’s surplus therefore must be understood as having the apostrophe before not after the s. It is the surplus of a consumer not the surplus of the con-sumers. This in itself deprives the notion of most of its practical applications. 132 Special topics But now before proceeding to the analysis and criticism of this more plausible concept let me pause to remove two minor variants. (1) The doctrine of consumer’s surplus is sometimes said to be justified because in a market a consumer gets his goods for less than he would be prepared to pay for them. That there is a surplus of marginal as well as on inframarginal purchases. Now stated thus the doctrine is entirely unacceptable. It is of course true that as Marshall suggests you can buy certain essential items in your budget cheaper in England, say, than on the West Coast of Africa. That is true. But it is not a matter of consumers surplus; it is a matter of different costs. Of course, on the West Coast of Africa some things are more expensive than they are in this coun-try, but that is not to say that when you buy them in this country you get your marginal purchases for less than they are worth to you; of course you do not. We have seen already that if the terms on which you can get commodities are less than your marginal estimation of those commodities there is an incentive to rearrange your expenditure until at the different margins marginal significance and price are proportionate to one another. Marshall’s illustration only seems plausible because he is contrasting different states of equilibrium.

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  Measuring the Benefits of Water Pollution Abatement

  • Daniel Feenberg(Author)
  • 2012(Publication Date)
  • Academic Press

    (Publisher)

  Marshall introduced the first scientific benefit measure, called con-sumer surplus (CS), in [31]. Consumer surplus is the area to the left of the demand curve f iE and above the price line. Thus, the change in consumer surplus (ACS) from a reduction of p E from/?^ top E is the area to the left of and between p E and p%. In Figure 3.2, this area is labeled ACS = A + C + F . (3.12) Unlike CV and EV, ACS is symmetrical between price decreases and in-creases. The gain in consumer surplus from a reduction of p E from p E to p% equals the loss of consumer surplus from an increase of p E from p% to p E . It is clear from (3.10)—(3.12) that the two Hicksian measures bracket the Marshallian measure: CV < ACS < EV. (3.13)

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