Consumer surplus - what is it? What is consumer and producer surplus?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

Often we are ready to pay more for this or that product than it actually costs, which is connected with our natural needs and desires. These capabilities of ours constitute a separate element in the structure of a he althy market, which we will discuss below.

What does the consumer need?

It is difficult to understand what consumer surplus is without fully understanding the driving force behind this phenomenon – demand. Everyone knows from economic theory that the latter is the basis of all market relations, since it is only thanks to it that supply is generated, and, accordingly, the equilibrium of the circulation of goods and services offered and consumed.

We are not ashamed to say that the market is driven by the consumer, who, in turn, relies on a number of factors when choosing a particular purchase.

No matter what anyone says, the primary driving force behind any buyer's actions is preferred features. No one will ever get what he does not need, so everyonestarts from his own personal needs.

At the second stage, the buyer maximizes the utility and rationality of his purchase, in other words, brings his desires closer to the equilibrium price-quality ratio.

Of course, one cannot do without comparing one's desires with one's own financial capabilities, but from here follows the next factor - the cost of a product or service in relation to the proposed substitute products from other manufacturers.

Now we can give an answer to the question posed earlier: the consumer needs a product that meets both his conscious and subconscious criteria, which are based on both conscious and subconscious factors.

How does a consumer usually behave?

So, we understand what the buyer's actions are based on, but what does it look like in practice? Obviously, a potential buyer may be interested in an identical product from several sellers at the same time, but then purchase it from only one or not make a purchase at all. Why is this happening?

The fact is that often the desires and needs of the buyer are of a rational nature, and everyone determines the degree of usefulness of a particular acquisition both for himself and for his family members. In addition, each representative of demand has its own threshold of financial restrictions, and if a particular product does not carry the essentials, it is unlikely that there will be anyone able to pay too high a price for it.

Oftenthe consumer is looking for a product at a lower cost, but this does not mean that it must be of poor quality. From here, we can jump ahead a bit and note that consumer surplus is the amount of money that is the difference between the price that the buyer was ready to pay and the price that he actually paid. In other words, I found an identical product at a lower cost from another seller.

Consumer and market

Do not forget that consumer surplus is primarily an element of a normal market, where there are also such components as supply and demand.

In accordance with the above information, we can conclude that the desire and ability of the buyer to purchase a particular product or service for a certain period of time and represent the phenomenon of demand. The latter depends on a number of factors: socio-cultural and demographic indicators of the market, the level of income of the population, the quality of the goods offered, the products of competitors and its cost.

In turn, demand interacts with supply, which also depends on both various external socio-cultural factors and internal ones. The latter include the level of expected consumption and the competitiveness of the product in the market.

So what is consumer surplus?

Well, we gradually got to the key concept of this article, around which, one might say, various causal market processes are developing. So the surplusconsumer is as much money as is left in your pocket after this or that acquisition, although you intended to spend it.

We all know from the foundations of economic theory about the regularities of the level of utility of a certain good for a unit of the population. So, for example, if you wanted an apple, and you bought a kilogram, then with each fruit you eat, its usefulness for you will decrease at a rate of negative arithmetic progression.

The maximum that you can pay for one eaten apple will be, for example, 5 rubles, and do not forget that with each unit the price you offer will decrease. In the market, you are offered to buy goods at 2 rubles per fruit, and the total difference between your price and the offered price will be consumer surplus. The formula for a more specific calculation of this indicator will be presented below. In the meantime, let's figure out what this phenomenon can affect.

How much profit can a consumer make?

It should be noted that the consumer's surplus is not only the amount of savings, it is primarily his own profit. For clarity of the example, let's draw a graph on which we will depict the constantly changing level of utility of our apple as the TU curve, and the indicator C will speak about material costs, the straight line q will indicate the amount of goods. We see that the maximum level of utility coincides with the price only at a certain amount of demand (q₀), and then the angle goes down, which means that consumer surplus, starting from this points,growing.

Thus, we can conclude: the higher the indifference curve rises above the marked convergence of indicators, the more profit the buyer will receive from the proposed transaction, and with the funds received he will be able to satisfy his other needs.

Consumer Surplus Against Aggregate Market

So, we have learned how the difference between the expected and actually paid amount of money for a particular product works on the example of a particular consumer. Now let's look at what consumer surplus might look like in the aggregate market. The chart below shows the price of our apples on the vertical axis (P) and the number of apples (Q) on the horizontal axis. At the same time, the P₀ mark indicates the level of the generally accepted market price for fruit on average.

By analogy, we draw utility curves along the price axis (they will be individual for each consumer) and determine the profit of each buyer in the form of shaded figures.

In a graphic image, everything is extremely simple and clear - there is a certain figure, it is the desired indicator, but how to find consumer surplus? The formula is quite simple: we need to calculate the area of \u200b\u200beach figure, and then sum up the figures obtained. The final figure will be the total profit of buyers in the apple market as a whole.

Consumer and producer surplus

If we are talking about the behavioral factor of the buyer, then it will beit is inappropriate not to recall some aspects of the behavioral factors of the seller. Do not forget that consumer and producer surpluses are interrelated indicators and, let's not be afraid to say, interdependent. At the same time, the latter indicates the difference between the amount of money that the seller planned to receive from the transaction and the actual proceeds.

In the chart below, line D indicates the price that the buyer is willing to pay, and line S indicates the cost that the manufacturer offers. At a certain point, they intersect (a deal is made), while the shaded triangles (upper and lower, respectively) indicate the benefit received by the consumer and the so-called costs of greater seller expectation.

How to achieve market equilibrium?

Why does it happen that whatever the buyer's possibilities and the seller's requests, they still meet at a certain price and quantity point in order to make a deal? And in this case, everyone is satisfied - someone received the proceeds, but someone satisfied their needs, and sometimes, if the budget plan allows, then there may also be consumer surplus, which is also a nice bonus, because the money is left !

All this happens because our market is elastic, in other words, any demand is sensitive to supply, product quality and its cost. At the same time, we can say that purchasing power is much more elastic and adapts to changes in external factors much faster,than the seller's ability.

Therefore, if the price of apples rises one day, demand will drop slightly for some time, but will subsequently recover, but if the tax policy regarding the purchase of apples becomes different, then the producer will need much more to gain its trading volume time.

Consumer Surplus and the State

Sometimes it happens that the state intervenes in the pricing process (often in countries with a planned economy) and sets a threshold for the cost of goods. On the graph (see below), the line P₁ indicates the border set by the government, which is below the equilibrium. In this case, of course, the consumer's profit will be much higher than before, but there may be a shortage of goods, which is graphically depicted on the interval Q₁ - Q₂.

Hence the conclusion is that any intervention by a third force entails a decrease in the welfare of the population, since a certain part of it will be left without goods. Therefore, the market process should be the result of the interaction of the buyer and the seller in a he althy competitive environment, and nothing more.