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Consumer surplus


The excess of the amount a consumer is prepared to pay for a good (rather than go without it) over the amount he actually does pay for it. This term, and a rigorous analysis of the concept, was put forward by A. Marshall, although the French engineer J. Dupuit first developed the idea in his analysis of the pricing of public services. The existence of consumer surplus for a good stems from the tendency of marginal utility to diminish as its consumption increases; thus a consumer might pay a maximum of 50p for the first unit of consumption of a good; 40p for the second unit (given that he possesses the first), 30p for the. third, and so on. We take this diminishing 'willingness to pay' as an indication that the satisfaction he derives rom the last unit of the good diminishes with the quantity consumed. If the price of the good is 30p, then the consumer can buy three units
for 90p, whereas the total value to him of the three units is (50p + 40p + 30p) =£1.20, and so his consumer surplus is 30p, The fact that consumption is at the level at which the value of the last unit consumed is just equal to price, while the values of all units before this exceed the price, ensures the existence of a consumer surplus.

Marshall'.s analysis of consumer surplus was open to the objection, applicable to thy whole of his theory of consumer demand, that it rested on the assumption that utility was a measurable quantity in the same way as profit, income and output are measurable quantities. However, J. R. Hicks was able to show that the theory of demand based on ordinary utility and indifference analysis could be used to redefine the concept of consumer surplus, although in the process the simplicity of the Marshallian concept was lost.

Reference: The Penguin Dictionary of Economics, 3rd edt.