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Microeconomic Theory

Notes 10. Distribution means the distribution of national income among the factors of production.

11. Every consumer wants to get the maximum satisfaction from a limited income.
12. Consumer is ignorant about many things concerning consumption.

3.13 Consumer’s Surplus: An Illustrative Description

We know that a consumer wishes to pay equal to marginal utility of the commodity. (Means wants
to pay that sum of amount which is equal to the marginal utility of the goods.) We also know that
marginal utility of the commodity tends to decrease as more and more of it is purchased. So, for this
reason the demand curve of the commodity slopes from left to right. In fact, the marginal utility curve
(showing inverse relation between quantity of the commodity and the marginal utility) is a synonym of
demand curve showing inverse relation between price and quantity of the commodity as the price of the
commodity is equated with marginal utility of that commodity. For each successive unit the consumer
in tends pays less every time equating price with the diminishing marginal utility of the commodity.
However, each unit of the commodity cannot be purchased at different prices. Implying that for certain
units he must intend to pay more what he actually pays. The sum total of the difference between what
he actually intends to pay and what he actually pays, is what is called consumer’s surplus.

Illustration

The below explains the consumer surplus of a consumer:

Table 4
X Unit MU P or price the consumer is ready Actual price Consumer surplus
X X
to pay (`) (intended price–actual price)
1st 100 10 4 10 – 4 = 6
2nd 80 8 4 8 – 4 = 4
3rd 60 6 4 6 – 4 = 2

4th 40 4 4 4 – 4 = 0

Consumer surplus is 6 + 4 + 2 = 12.

(Note: the marginal utility of the money is 10 units and is constant.)
The Fig. 3.6 shows that the consumer intends to pay for every successive units of a commodity. He
intends to pay L, L ……. L which means that in accordance to consumer rationality he pays equal
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to the marginal utility of the commodity. As the marginal utility tend to decrease with every unit of
commodity, consumer demands more unit of the commodity at low price. If the total purchase is OS,
then the consumer intends price is equal to area OSL L (OSL L area is the area which is obtained by
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adding up price for each unit that the consumer intends to pay). The total actual price the consumer has
to pay is OS × OP = OSL P.
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