Explain Consumer Surplus
Economists have long looked for ways to gauge consumer satisfaction. Consumer surplus is an economic model that emerged in the 19th century to do just that. Still, questions remain about the concept.
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Theory
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Consumer surplus is the difference between what a consumer is willing to pay for a product or service and what he actually pays. Based on this concept, when a consumer is willing to pay above market prices, a consumer surplus would be in effect.
History
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French economist Jules Dupuit is credited with developing consumer surplus as a measure of consumer satisfaction in 1844. British economist Alfred Marshall is noted for later contributions to the concept.
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Effects
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Marshall believed that as purchases of a commodity increase, consumer satisfaction as a whole will eventually exceed total market value. For example, consumers might only pay a few dollars to have a punctured car tire plugged. Yet the plug is worth more to people who avoid paying a higher price for a new tire, although they probably were willing to do so to keep the car in operation.
Consumer Benefits
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Consumers also can benefit from an increase in product supplies. As supplies increase, prices often fall. In such cases, consumer surplus also increases because people pay less for products that they might value above the sticker prices.
Business Benefits
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A manufacturer or service provider can benefit from a rise in consumer surplus. For instance, as perceptions of a product's value increase, customers are willing to pay higher prices for it.
Considerations
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Consumer surplus has fallen into disfavor with some economists, who point out that a person's satisfaction with one product is not isolated. They note that the availability of other commodities and their prices also can influence satisfaction.
Potential
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Economists still consider consumer surplus despite questions about the effectiveness of the concept. For instance, it's used in welfare economics to examine how economic policies benefit a community.
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References
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