Consumers' Surplus
The assumption that consumers
maximize utility leads to the downward-sloping demand
curve. Actually, even non-rational or random behavior will
lead to a downward-sloping demand curve, as economist Gary
Becker has demonstrated, but this demand curve does not have
the same interpretation that a demand curve based on utility
maximization (trying to attain goals) has.
Becker's argument is quite simple. Because the budget
line is a constraint separating what is possible from what
is not possible, even non-rational consumers face a budget
constraint. Becker notes that if people randomly purchase
goods, they will be randomly distributed, either along a
budget
constraint or within the area bordered by the budget
constraint. (Becker considers both cases.) If the price of a
good increases, the budget line will shift and a new random
distribution of points will occur. The geometry of the
situation implies that, on the average, people will buy less
of a good as its price rises.
Although the demand curve of non-rational consumers will
slope downward, it can no longer be interpreted as a locus
of points of consumer equilibrium. With the assumption of
utility maximization, the preferences and prices used to
construct the graph above imply that q2 is the amount
of good A that is optimal for the consumer. If either more
(q3) or less (q1) is being used, there is an
incentive to change behavior because it would lead to better
fulfillment of goals. However, if behavior is random and not
concerned with fulfilling goals, point x is as good as point
z. Thus, the argument that price
controls have unintended results depends on the
assumption that behavior is goal-directed.
Utility maximization suggests that the demand curve,
because it measures buyer's willingness to pay, shows
marginal benefits to buyers. The table below indicates that
people will buy only one item if the price is $5.00, or that
people are willing to pay $5.00 for the first item. They are
not willing to pay $5.00 for a second item, but only $4.00.
A second item has a smaller marginal benefit than the first
because of the law
of diminishing marginal utility. The equimarginal
principle suggests that as price gets lower, consumers find
that they must use more of an item to keep equality among
marginal-utility-to-price ratios. Alternatively, as people
use more of an item, its marginal utility drops, and so must
its price if they are to stay in equilibrium.
A Demand
Curve
|
Price
|
Amount People Are
Willing to Buy
|
$5.00
|
1
|
$4.00
|
2
|
$3.00
|
3
|
$2.00
|
4
|
$1.00
|
5
|
$0.50
|
6
|
This notion of the demand curve has an interesting
implication known as the consumers' surplus. If in
the table above consumers are buying three items, they must
pay a total of $9.00. But the total value to them is $5.00 +
$4.00 + $3.00 = $12.00. There is a surplus value of $3.00.
In a more intuitive example, suppose that a person has been
working in the hot sun all afternoon and is extremely
thirsty. This person may be willing to pay as much as $2.00
for a can of cold beer, but if he can buy it for only $.50,
he thinks he has found a good deal and may buy two or three.
The difference between the maximum a person would pay and
the actual amount that he does pay is consumers' surplus. In
other words, consumers' surplus is the difference between
the value in use of an item and its value in
exchange.
Notice that consumers' surplus is not related to the type
of surplus that occurs in a market when price is above
market-clearing price. Perhaps economists would have avoided
this possible confusion if they had used a term other than
consumers' surplus for this concept, but they did not and
the term is now well-established.
In the early days of economics people puzzled over what
was called the paradox of
value. This paradox disappears once we understand
consumer surplus.
Copyright
Robert Schenk
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