Surplus of consumers are considered as the significant in the cost-benefit to analysis on the public investment for the welfare of the society. Rate of the product is always less than what a person is willing to pay for it. The difference between consumers wills to pay and those actual pays lead to satisfaction which is consumer surplus.
On the other hand, surplus of producer exists when actual price exceeds the minimum price that the seller is ready to accept. Resource owners usually captured producer’s surplus.
Meaning of Consumer Surplus:
At first, Marshall had proposed the theory of consumer surplus which is based on demand theory. He states, consumer surplus is a part of the benefit, which a person derives from his environment or conjuncture. The price, which a person pays for a product is always less than what he is willing to pay for it.
So, the difference between the amounts of consumer is willing to pay and what he actually pays is known as the satisfaction which is consumer surplus. Take an example of consumer surplus –
If a consumer is willing to pay Rs. 5 for one orange and the actual price is Rs. 3, then the consumer surplus is Rs. 2.
In this diagram, the DD1 is the curve for a commodity. If OP1 is the price then the quantity demand is OQ1. The consumer is ready to pay OD price but actually he pays OP1. So the consumer surplus is P1R1D, (Q1R1D-OP1R1Q1 = P1R1D).
Now, let us assume that the price comes down to OP2. In this situation, the quantity demanded will increase to OQ2; that is due to decrease in price, the consumer surplus will increase. So the new consumer surplus is P2R2D. That is, there is increase of consumer surplus by P2R2R1P1 (P1R1D+P1R1R1P2). This increase in consumer surplus is due to decrease in price. If the price increases there will be decrease in consumer surplus.
On the other hand, surplus of producer exists when actual price exceeds the minimum price that the seller is ready to accept. Resource owners usually captured producer’s surplus.
Meaning of Consumer Surplus:
At first, Marshall had proposed the theory of consumer surplus which is based on demand theory. He states, consumer surplus is a part of the benefit, which a person derives from his environment or conjuncture. The price, which a person pays for a product is always less than what he is willing to pay for it.
So, the difference between the amounts of consumer is willing to pay and what he actually pays is known as the satisfaction which is consumer surplus. Take an example of consumer surplus –
If a consumer is willing to pay Rs. 5 for one orange and the actual price is Rs. 3, then the consumer surplus is Rs. 2.
In this diagram, the DD1 is the curve for a commodity. If OP1 is the price then the quantity demand is OQ1. The consumer is ready to pay OD price but actually he pays OP1. So the consumer surplus is P1R1D, (Q1R1D-OP1R1Q1 = P1R1D).
Now, let us assume that the price comes down to OP2. In this situation, the quantity demanded will increase to OQ2; that is due to decrease in price, the consumer surplus will increase. So the new consumer surplus is P2R2D. That is, there is increase of consumer surplus by P2R2R1P1 (P1R1D+P1R1R1P2). This increase in consumer surplus is due to decrease in price. If the price increases there will be decrease in consumer surplus.
0 comments:
Post a Comment