Table of Contents

According to Marshall, “the excess of price which the consumer would be willing to pay rather than go without it, the thing over which he actually does pay is the economic measure of the surplus of satisfaction. It may be called consumer surplus.”


Assumptions:

Few assumptions related to consumer surplus are as follows: -


  1. Here Marshall assumes cardinal or numerical measurement of utility of every purchase.
  2. Consumer surplus concept is based on Law of Diminishing Marginal Utility and thus, it contains constant conditions.
  3. Marginal Utility of money remains constant.
  4. There are no substitutes available for the product.


Criticism:

Criticism in reference to consumer surplus is as follows: -


1. It is based on unrealistic assumptions –

  1. It is based on cardinal/numeric measurement of utility but in reality consumer surplus can’t be expressed numerically or in numbers.
  2. Marginal Utility of money doesn’t remain same.
  3. This concept is not applicable in case of substitutes.


2. Consumer Surplus concept is imaginary and illusionary.


3. Consumer Surplus is meaningless in case of necessities – food, water, clothing. The measurement will become meaningless.


4. No practical utility – The concept of CS is based on theoretical principles and has no practical significance.

 

Measurement of Consumer Surplus:

CS = TU – [P*Q]

Here,

CS = Consumer Surplus

TU = Total Utility

P = Price

Q = Quantity


Consumer Surplus = Prepared to Pay – Actual Price Paid


The concept of Consumer Surplus is a relative concept because the term utility is relative, i.e., it differs from person to person as from time to time. Even it differs from commodity to commodity.

In case of necessary commodities whose prices are low, consumer surplus will be higher than the high price of luxuries.