Consumer Surplus

Posted: September 6th, 2013

Consumer Surplus

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Consumer surplus

Question 1

The quantity of DVDs bought is shown by the price of the DVDs and quantity. Twenty DVD’s are bought per day at $15 per DVD. This is the market price of the DVDs. This is the actual price that the consumers pay to get the DVD’s. However, they prefer to spend more in order to find the satisfaction for the product. The excess of the market price they pay is what is depicted as the consumer surplus.

Consumer surplus is the variation between the highest price a consumer is ready to spend on a good and the market price that is set for the good. The market price is the actual price they spend on the good. The market price of a DVD is $15 and the equilibrium quantity of DVDs per day is currently twenty. According to the market demand curve, consumers are willing to pay $20 for each DVD, and have access to ten DVDs per day. The consumers are also ready to spend $15 for each DVD, and have access to twenty DVDs per day. They can however still purchase twenty DVDs at $15 per DVDs. The surplus therefore is the variation between the money they are willing to spend, and the actual market price that they pay. These two values are thereby used to calculate the surplus. Therefore the surplus will be,

($20-$15) + ($15-$15) =$5

The consumer will therefore gain $5 worth of consumer surplus.

However, this value is only an approximate value of the actual consumer surplus. On a graphical representation, the accurate consumer surplus is given by the area beneath the market demand curve and that over the market price. This area on the graph entails a triangle with a base length of twenty and a height of ten. Relating to the calculated area of a triangle, which is one-half the base multiplied by the height, the actual consumer surplus is obtained. For this particular calculation, this will be,

½*20*10=100

Therefore, the calculated surplus will be 100.

Question 2

In finding the total amount spent on the DVD’s and the total benefit derived from the DVD’s, at the price of $20, 10 DVDs are bought. The consumer is therefore willing to forego $20 worth of other goods and spend this money on the DVDs. He is also willing to spend $15 on twenty DVD’s and $10 on thirty DVDs. Therefore, the total benefit will be represented as,

Therefore, the marginal benefit of each unit is equal to its price shown on the demand curve. The total benefit is equal to the total of the marginal benefits of the products purchased. On the graph, the total benefit therefore is the part beneath the demand curve until the part showing the quantity purchased. In this case, the total benefit is the part beneath the demand curve until the part showing the thirty quantities of DVDs purchased at a price of $10. The marginal benefit is the change in total benefit when an additional unit is consumed. The total benefit will therefore be, ($35-$20) + ($45-$35) = $25

The total amount spent on the DVD’s will be, $20+$15+$10=$45

The part beneath the demand curve represents the total benefits to the purchase of the DVD’s. The benefit of the consumer is obtained by the area under his demand curve.