Skip to main content

What is a consumer surplus in economics?

In economics, a consumer surplus represents the difference between what a customer is willing to pay for a product and the actual price of the product itself. Consumer surplus is based on what is called the law of diminishing marginal utility.


In economics, marginal utility refers to the enjoyment or pleasure a customer gets from consuming one more unit of a product. So, the highest utility is measured during the consumption of the first unit. As each succeeding unit is consumed, the pleasure the customer receives from the product diminishes. For example, the first slice of pizza a hungry customer consumes is bound to register highly on the utility scale. The customer is hungry, and the savory offering is thoroughly satisfying. On the second slice, the customer is still pretty happy. By the tenth slice, though, he may well be groaning in pain.


The law of diminishing utility states that consumption of each succeeding unit of a product leads to diminished satisfaction. Similarly, consumer surplus diminishes with increased consumption. For example, the hungry customer above may have been willing to pay $10 for the first slice of pizza (let's say it's the only pizza he can find within 50 miles). By the time he gets to thinking about his eleventh slice, he may not feel wlling to pay anything.


To measure consumer surplus, remember that it constitutes the difference between what a customer is willing to spend and the market price of the product in question. Our hungry customer was perfectly happy to shell out $10 for his first slice of pizza, even though the market price is usually only about $4.00. In this case, his consumer surplus would be $10-$4= $6. The consumer surplus becomes negative when the customer pays more than what he's willing to pay. As the hungry customer begins to feel fuller, he likely will not be willing to pay as high of a price for a slice of pizza. By his tenth slice, the customer's consumer surplus is probably a negative value.

Comments

Post a Comment

Popular posts from this blog

Is there a word/phrase for "unperformant"?

As a software engineer, I need to sometimes describe a piece of code as something that lacks performance or was not written with performance in mind. Example: This kind of coding style leads to unmaintainable and unperformant code. Based on my Google searches, this isn't a real word. What is the correct way to describe this? EDIT My usage of "performance" here is in regard to speed and efficiency. For example, the better the performance of code the faster the application runs. My question and example target the negative definition, which is in reference to preventing inefficient coding practices. Answer This kind of coding style leads to unmaintainable and unperformant code. In my opinion, reads more easily as: This coding style leads to unmaintainable and poorly performing code. The key to well-written documentation and reports lies in ease of understanding. Adding poorly understood words such as performant decreases that ease. In addressing the use of such a poorly ...
Post a Comment
Read more

A man has a garden measuring 84 meters by 56 meters. He divides it into the minimum number of square plots. What is the length of the square plots?

We wish to divide this man's garden into the minimum number of square plots possible. A square has all four sides with the same length.Our garden is a rectangle, so the answer is clearly not 1 square plot. If we choose the wrong length for our squares, we may end up with missing holes or we may not be able to fit our squares inside the garden. So we have 84 meters in one direction and 56 meters in the other direction. When we start dividing the garden in square plots, we are "filling" those lengths in their respective directions. At each direction, there must be an integer number of squares (otherwise, we get holes or we leave the garden), so that all the square plots fill up the garden nicely. Thus, our job here is to find the greatest common divisor of 84 and 56. For this, we prime factor both of them: `56 = 2*2*2*7` `84 = 2*2*3*7` We can see that the prime factors and multiplicities in common are `2*2*7 = 28` . This is the desired length of the square plots. If you wi...
Post a Comment
Read more

What warning does Chuchundra issue to Rikki?

Chuchundra, the sniveling, fearful muskrat who creeps around walls because he is too terrified to go into the center of a room, meets Rikki in the middle of the night. He insults Rikki by begging him not to kill him. He then insults him by suggesting that Nag might mistake Chuchundra for Rikki. He says, "Those who kill snakes get killed by snakes."  He issues this warning to Rikki not to help keep Rikki safe but as a way of explaining why Rikki's presence gives him, Chuchundra, more reason to fear.  Chuchundra starts to tell Rikki what Chua the rat told him--but breaks it off when he realizes he might be overheard by Nag. He says, "Nag is everywhere, Rikki-Tikki." Rikki threatens to bite Chuchundra to get him to talk. Even then, Chuchundra won't overtly reveal any information. But he does say, "Can't you hear, Rikki-Tikki?" This is enough of a clue for the clever mongoose. He listens carefully and can just make out the "faintest scratch-s...
Post a Comment
Read more