consumer surplus

consumer surplus, in economics, the difference between the price a consumer pays for an item and the price he would be willing to pay rather than do without it. As first developed by Jules Dupuit, French civil engineer and economist, in 1844 and popularized by British economist Alfred Marshall, the concept depended on the assumption that degrees of consumer satisfaction (utility) are measurable. Because the utility yielded by each additional unit of a commodity usually decreases as the quantity purchased increases, and because the commodity’s price reflects only the utility of the last unit purchased rather than the utility of all units, the total utility will exceed total market value. A telephone call that costs only 20 cents, for example, is often worth much more than that to the caller. According to Marshall, this excess utility, or consumer surplus, is a measure of the surplus benefits an individual derives from his environment.

If the marginal utility of money is assumed to be constant for consumers of all income levels and money is accepted as a measure of utility, the consumer surplus can be shown as the shaded area under the consumer demand curve in the figure. If the consumer purchases MO of the commodity at a price of ON or ME, the total market value, or amount he pays, is MONE, but the total utility is MONY. The differences between them are the shaded area NEY, the consumer surplus.

The concept fell into disrepute when many 20th-century economists realized that the utility derived from one item is not independent of the availability and price of other items; in addition, there are difficulties in the assumption that degrees of utility are measurable.

The concept is still retained by economists, in spite of the difficulties of measurement, to describe the benefits of purchasing mass-produced goods at low prices. It is used in the fields of welfare economics and taxation. See utility and value.