Consumers' surplus Essay Example | Topics and Well Written Essays - 1250 words

Consumers' surplus - Essay Example The first major insight that students obtain from the study of microeconomics is the theory of demand and supply. Nevertheless, the demand is the willingness and ability of individuals of consumers to acquire certain goods and services. Therefore, when prices increase (assuming determinants of demand constant) the quantity demanded decreases and vice versa, thereby resulting in a downward sloping demand curve due to negative price – quantity relationship. In contrast, the supply refers to willingness and ability of sellers to produce and sell certain goods and services. Hence, when prices increase (assuming determinants of supply constant) the quantity supplied also increases because of increase in profit margin of producers and vice versa. In simple words, the supply curve slopes upward due to positive price – quantity relationship. In this paper, I would elucidate on Consumer Surplus – a theory contributed by Alfred Marshall in 1920s (and derived by using the d ownward sloping demand curve) that initially received various serious criticism by then economists and academicians. Dooley (1983, p. 26) has summarized the following major criticisms raised at that time - â€Å"First, whether an additive utility function adequately explains consumer behavior; second, whether the marginal utility of money can be treated as a constant; third, whether the quantity demanded of one commodity can be treated as a function of its price alone; and fourth, whether it is possible make interpersonal comparisons†. The researcher will first explain what Consumer Surplus theory is after which an analysis will be presented on the credibility of this theory. The researcher will conclude this paper by providing a personal opinion and will finally provide 2 recommendations to the economists and pundits. 2. Analysis / Body Consumer Surplus is a concept studied in microeconomics and it refers to the estimation of consumer utility. In simple words, consumer surpl us is the surplus portion calculated by subtracting the maximum price consumer wants to pay for acquiring a good or service with the equilibrium market price. This could also be defined as the difference between the actual paid market price and the highest price at which demand of a product exists. As illustrated in Figure 1, the equilibrium quantity and price are P1 and Q1 respectively; however, the demand of a product also exists at higher prices. Therefore, the blue portion represents consumer surplus. Figure 1 In order to fully comprehend the theory of Consumer Surplus, I would like to present an example of demand of DVDs (video games) relative to their price. In this case, let us consider that a  consumer enters in a Computer shop to buy video games. The consumer buys 10 DVDs of $50 in total but he is inclined to pay $95 for one DVD so the consumer’s surplus for 1 unit will be $45, for 2 units will be $40, for 4 units will be $30, for 6 units will be $20, for 8 units w ill be $10 and for 9th unit will be $5 only. The figure 2 illustrates the consumer surplus in green, which is below the market demand curve and above the equilibrium market price. Figure 2 Samuelson & Nordhaus (2005, p. 96) highlights the following: â€Å"Consumer Surplus is the gap between the total utility of a good and its total market value†