Interpret the concept of Consumer Surplus

The concept of consumer surplus is based on demand theory by Marshall According to Marshall, consumer surplus is a part of the benefit, which a person derives from his environment of conjuncture. The price, which a person pays for a product is always less than what he is willing to pay for it. The differences between the amount the consumer is willing to pay and what he actually pays leads to satisfaction which is consumer surplus. Let us illustrate this with as example. If a consumer is willing to pay Rs. 5/- for one orange and the actual price is Rs. 3/- , then the consumer surplus is Rs. 2/-.

In this diagram, the DD1 is the curve for a commodity. If OP1 is the price then the quantity demanded is OQ1. the consumer surplus is P1R1D, (Q1R1D- OP1R1Q1 = P1R1D).

Operational significance of Consumer Surplus:

Consumer surplus concept has many uses and significances. We will discuss the application of consumer surplus under the following divisions:

1. Cost benefit Analysis

2. Evaluation loss and benefit due to tax

3. Gains from Subsidies

1. Cost benefit Analysis:

Cost Benefit analysis is done for the public investment projects. This is used to judge the desirability of public investment of any public projects or investment. In this, we don’t analyze the money cost and money benefit; but real cost and real benefit. Here it is concerned with social benefit and social cost. Cost benefit analysis is done for the public projects to analyze the social benefits from the public investment