Explain the concept of consumers surplus and difficulties in measurement
Answers
In Microeconomics,consumer surplus is mathematically calculated as the difference between the maximum price that consumer is willing to pay and the price that he or she actually pays.
Explanation:
For every product or service,there is a maximum price that a consumer is willing to pay based on individual preference and product perception.However,the market price of the product might not reflect that maximum willingness to pay and might be different than that.It is conceptually based on the notion of diminishing marginal utility of consumption which states that the additional utility or satisfaction obtained from purchasing one more unit of a product declines and hence,the willingness to pay for the same product also decreases among the consumers.Therefore,the maximum willingness to pay for any product decreases among consumers as the consumption level increases.
The maximum price that a consumer is willing to pay for any product/service is related to his or her utility level or usefulness obtained from the consumption of any particular product,which is completely subjective and varies from individual to individual.Therefore,many economists argue that there is no specific mathematical yardstick to measure maximum price that a consumer is willing to pay for any product.Therefore,mathematical calculation of consumer surplus is often difficult and can be inexact.