Consumers Surplus

Consumers Surplus

Consumer's Surplus, a concept generally associated with the name of Alfred Marshall. It is based upon the observation that consumers seldom pay the price for a commodity that they would be prepared to pay rather than go without it. Because of the law of diminishing marginal utility further units of a commodity will be bought only if its price falls. Conversely, the price which will clear the market of supplies of a commodity will be determined by its marginal sig-nificance to consumers, not by its total significance. The total satisfaction derived from buying a given quantity of a commodity at a price is thus larger than the loss of satisfaction represented by the total amount of money spent. The measure of a consumer's surplus is the excess of the money he would be willing to pay, rather than go without the amount bought, over the amount of money he does pay.

The concept of consumer's surplus is used at several points in economic analysis. For example, it introduces an important qualification into the theory of price: although willingness to pay the price for a commodity or service indicates that the community values it more than possible alternatives, the converse need not follow from unwillingness to pay a uniform price. There may be a commodity or service that could not at any single price attract sufficient demand to cover its cost of production. But charging discriminating prices, tapping consumers' surpluses by charging most those who receive the largest benefit, may enable it to be provided and the costs to be covered. Again, the concept suggests that the increases in price due to outlay taxation cause losses of consumer satisfaction. If the only consideration were to minimize such loss it would be better to levy income taxes rather than to tax commodities: income taxes reduce incomes but leave consumers to adjust themselves to the cut in income by paring expenditure all round in a way that keeps individual losses of satisfaction to a minimum; commodity taxes, by selectively raising prices, result in the loss of large chunks of consumer's surplus regardless of consumers' individual preferences. But here again economists differ about the meaning and measurement of consumers surplus.

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Since then his writings have in turn been increasingly reinterpreted as a special case both by some followers and by some economists who had not wholly accepted his writings. The content of economics is in a state of change, and this site is therefore not a final statement of economic doctrine.

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