Firstly, this theory was developed by French Engineer A.J. Dupit in 1844. Later on it was reformulated by Professor Marshall. This theory is related to the expenditure of daily life. While buying the commodity the consumer always thinks about the utility that he/she can get from the commodity. If consumer can get higher amount of utility in comparison to sacrifice made for the commodity than consumer have surplus. Consumer surplus is the excess amount of utility over sacrifice made for the commodity.
Consumer surplus is the excess amount of price that the consumer is ready to pay over actual price of commodity. Therefore, Consumer surplus = Ready to pay – Actual price of commodity.
We can explain this concept of commodity on the basis of given table:
|Units of Commodity||Ready to pay M.U||Actual Price||Consumer Surplus|
|Total = 40||Total = 20||20|
On the above table, when consumer purchase first unit of he/she is ready to pay Rs 12 but actual price is Rs 4. So consumer gets surplus. Similarly the consumer is trady to pay Rs. 10, 8, 6, 4 for 2, 3, 4, and 5th commodity where actual price is Rs 4 and he/she gets 6, 4, 2, and 0 surpluses respectively. Hence total consumer surplus = T.U – T.E = 40 – 20 = 20.
On the above figure, x and y-axis measures unit of commodity and price/M.U respectively. The shaded area is consumer surplus because it is the excess amount of satisfaction over the actual sacrifice made for the commodity.
Have a question? Ask us in our discussion forum.