Shopping on line can be easy, simple and save you lots of money. It can also take a lot of your time, frustrate you, and result in unwanted purchases. Now the same can be said for regular high street shopping, but with the vast opportunity presented by the Internet it will pay you to spend a few minutes reading this and understanding how to better optimize your Consumer Surplus shopping experience:
1. Compare - without doubt the biggest advantage that the Consumer Surplus offers shoppers today is the ability to compare thousands of Consumer Surplus at a time. This is a great thing, but not necessarily all the time! Too much can be daunting at times so take advantage of the great comparison sites and where possible let them do the hard work for you.
2. Research - if it has been said it will be on the internet. Ignorance is no longer a justifiable reason for buying the wrong thing. Take the time to research in detail everything that you could possible want to know about
3. Testimonials - don't know anybody that has bought a Consumer Surplus? Wrong! If the Consumer Surplus is good the internet will let you know. Use the Internet as a friend and get testimonials before you buy.
4. Questions - Got a question about Consumer Surplus then search the Forums, FAQ's, Blogs etc. Don't be afraid to ask .....
5. Reputation - Never heard of the company selling Consumer Surplus? Don't worry, no reason why you should know every company in the world, but you know someone that does! Use the internet to find out what people are saying about Consumer Surplus and build up a picture of their reputation for sales, returns, customer service, delivery etc.
6. Returns - still worried that even after all of the above your Consumer Surplus wont be what you want? Check out the returns policy. There is so much competition now that someone, somewhere is bound to offer the terms that you are comfortable with.
7. Feedback - happy with your Consumer Surplus then let people know, after all you are depending on others people input in your buying decision, so why not give a little back.
8. Security - check for the yellow padlock on the Consumer Surplus site before you buy, and the s after http:/ /i.e. https:// = a secure site
9. Contact - got a question about Consumer Surplus, or want to leave a comment then check out the sites contact page. Reputable companies have them and respond.
10. Payment - ready to pay for your Consumer Surplus, then use your credit card or PayPal! Be aware of companies that don't accept them, there may be genuine reasons but given the huge amount of choice you have when buying online there is no reason at all not to buy via credit card or PayPal.
Consumer surplus or
Consumer's surplus (or in the plural
Consumers' surplus) is the difference between the price consumers are willing to pay (or reservation price) and the actual
price. If someone is willing to pay more than the actual price, their benefit in a transaction is how much they saved when they didn't pay that price. For example, a person is willing to pay a tremendous amount for water since he needs it to survive, however since there are competing suppliers of water he is able to purchase it for less than he is willing to pay. The difference between the two prices is the consumer surplus.
Calculation from supply and demand
The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on a
supply and demand figure. The consumer surplus is the area under the demand curve and above a horizontal line at the equilibrium price. If the demand curve is a straight line, the consumer surplus is the area of a triangle:
CS = 1/2 Q_{mkt} \left( {P_{max} - P_{mkt--> \right)
For more general demand and supply functions, these areas are not triangles but can still be found using Integral. Consumer surplus is thus the definite integral of the demand function with respect to price, from the market price to the maximum reservation price (i.e. the price-intercept of the demand function):
CS = \int_{P_{mkt-->^{P_{max--> D(P)\, dP,
where D(P_{max}) = 0.\,
The graph shows, that if we see a rise in the equilibrium price and a fall in the equilibrium quantity, then consumer surplus falls.
Distribution of benefits when price falls
When supply of a good expands, the price falls (assuming the demand curve is downward sloping) and consumer surplus increases. This benefits two groups of people. Consumers who were already willing to buy at the initial price benefit from a price reduction, and additional consumers who were unwilling to buy at the initial price but will buy at the new price and also receive some consumer surplus.
Consider an example of linear supply and demand curves. For an initial supply curve S0, consumer surplus is the triangle above the line formed by price P0 to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands from S0 to S1, the consumers' surplus expands to the triangle above P1 and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.
Some people were willing to pay the higher price P0. When the price is reduced, their benefit is the area in the rectangle formed on the top by P0, on the bottom by P1, on the left by the price axis and on the right by line extending vertically upwards from Q0.
The second set of beneficiaries are new consumers, those who will pay the new lower price (P1) but not the higher price (P0). Their additional consumption makes up the difference between Q1 and Q0. Their consumer surplus is the triangle formed by on the left by the line extending vertically upwards from Q0, on the right by the demand line, and on the bottom by the line extending horizontally to the right from P1.
Rule of one-half
The
rule of one-half estimates the change in surplus for small changes in supply with a constant demand curve. Following the figure above,
\Delta CS = 0.5\left( {Q_1 - Q_0 } \right)\left( {P_0 - P_1 } \right)
where:
- CS = Consumers' Surplus
- Q0 and Q1 are the quantity demanded before and after a change in supply
- P0 and P1 are the prices before and after a change in supply
Comparison to profit
In terms of supply and demand, consumer's surplus is the analog to producer's surplus.
History
The idea of consumer's surplus was due to
Jules Dupuit and extended by
Alfred Marshall.
See also
Consumer surplus or
Consumer's surplus (or in the plural
Consumers' surplus) is the difference between the price consumers are willing to pay (or reservation price) and the actual price. If someone is willing to pay more than the actual price, their benefit in a transaction is how much they saved when they didn't pay that price. For example, a person is willing to pay a tremendous amount for water since he needs it to survive, however since there are competing suppliers of water he is able to purchase it for less than he is willing to pay. The difference between the two prices is the consumer surplus.
Calculation from supply and demand
The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on a
supply and demand figure. The consumer surplus is the area under the demand curve and above a horizontal line at the equilibrium price. If the demand curve is a straight line, the consumer surplus is the area of a triangle:
CS = 1/2 Q_{mkt} \left( {P_{max} - P_{mkt--> \right)
For more general demand and supply functions, these areas are not triangles but can still be found using Integral. Consumer surplus is thus the definite integral of the demand function with respect to price, from the market price to the maximum reservation price (i.e. the price-intercept of the demand function):
CS = \int_{P_{mkt-->^{P_{max--> D(P)\, dP,
where D(P_{max}) = 0.\,
The graph shows, that if we see a rise in the equilibrium price and a fall in the equilibrium quantity, then consumer surplus falls.
Distribution of benefits when price falls
When supply of a good expands, the price falls (assuming the demand curve is downward sloping) and consumer surplus increases. This benefits two groups of people. Consumers who were already willing to buy at the initial price benefit from a price reduction, and additional consumers who were unwilling to buy at the initial price but will buy at the new price and also receive some consumer surplus.
Consider an example of linear supply and demand curves. For an initial supply curve S0, consumer surplus is the triangle above the line formed by price P0 to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands from S0 to S1, the consumers' surplus expands to the triangle above P1 and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.
Some people were willing to pay the higher price P0. When the price is reduced, their benefit is the area in the rectangle formed on the top by P0, on the bottom by P1, on the left by the price axis and on the right by line extending vertically upwards from Q0.
The second set of beneficiaries are new consumers, those who will pay the new lower price (P1) but not the higher price (P0). Their additional consumption makes up the difference between Q1 and Q0. Their consumer surplus is the triangle formed by on the left by the line extending vertically upwards from Q0, on the right by the demand line, and on the bottom by the line extending horizontally to the right from P1.
Rule of one-half
The
rule of one-half estimates the change in surplus for small changes in supply with a constant demand curve. Following the figure above,
\Delta CS = 0.5\left( {Q_1 - Q_0 } \right)\left( {P_0 - P_1 } \right)
where:
- CS = Consumers' Surplus
- Q0 and Q1 are the quantity demanded before and after a change in supply
- P0 and P1 are the prices before and after a change in supply
Comparison to profit
In terms of
supply and demand, consumer's surplus is the analog to
producer's surplus.
History
The idea of consumer's surplus was due to Jules Dupuit and extended by
Alfred Marshall.
See also
Economic surplus - Wikipedia, the free encyclopedia
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