Consumer Surpluses
Consumer surplus refers to the difference between the price consumers willingly pay and the required amount payable by consumers, that is, the additional utility people deserve from consumption of a product. (Anderton, 2000)
Demand curve below shows that equilibrium market price for six bottles of mineral water is RM5.00 each. Those who value a bottle of mineral water at RM5.00 or more will buy it and would obtain consumer surpluses. (Case & Fair, 2004) Consumers will buy a product regardless of the increased price from the initial market price only if there is extra utility (consumer surplus) for them and the price does not exceed their budget.
For instance, Bob dropped by a shop and he decided to buy five bottles of mineral water at RM5.00 per bottle. The first bottle was worth RM10 to him, his second RM9, his third RM8, his fourth RM7, and his fifth RM6. A sixth bottle would either worth below RM5.00 to him or simply worthless. The consumer surplus Bob gained by purchasing five bottles of mineral water is RM5.00 for the first bottle, RM4.00 for the second, RM3.00 for the third, RM2.00 for the fourth, and only RM1.00 for the fifth, thus totally RM15.00. (Collinge & Ayers, 2000)
Law of Diminishing Marginal Utility concludes that when Bob consume more of a product, "each additional unit he consumed will yield successively less satisfaction."(Case & Fair, 2004: 48) He gets consumer surplus for the initial units as he is willing to pay more but not from the sixth bottle as he is not willing to pay more than RM5.00 for the sixth bottle. (Case & Fair, 2004) In short, as Bob pays the price of the last unit for all initial units consumed, he enjoys consumer surpluses for the units bought ...