Surplus measurement techniques

Surplus measurement

Consumer surplus concept 

Alfred Marshall implemented demand surplus in economics, while the term was used at least in the first half of the nineteenth century in literature by the French economist Dupuit. The price that a consumer pays for an object will rarely surpass and never approaches what he can spend more than to abandon. 

The value that he or she gets while buying a commodity usually equals what he or she gives up while paying the price. In brief, the profit which a person benefited from buying anything for which he desired to pay a high price because it could be referred to as the surplus of his customer. 

Measurements of Consumer surplus technique

The principle of consumer surplus is based on the following assumptions: 

- Use of an object that can be calculated

Consumer surplus theory presupposes that usefulness can be measured. Marshall assumed that the value is a measurable entity in his cardinal utility theory. The imaginary unit for measuring usability is called "util."

- There are no substitute materials.

The second important assumption is that there are no substitutes for the commodity being considered. 

- The paribus of Ceteris

This assumption means that the income, tastes, preferences and mode of the customer are not altered during the analysis. 

- There is a persistent marginal usage of capital.

The theory of consumer surplus also assumes that the provision of money in the customer's hands is consistent. Any shift in the volume of money in consumers' pockets does not impact aggregate usage. This presumption is required since money cannot act as a measuring rod without it. 

- Definition of decreased usefulness

The principle of surplus products is based on the rule on decreased marginal consumption. The provision of rising marginal usage states that the marginal usage generated from this substance declines gradually when you use more of an item. 

- Marginal benefit alone

This assumption implies that the marginal utility derived from the subject commodity does not depend on the marginal utilities derived from other commodities. 

Surplus measurement difficulties 

Consumer excess is measured between two prices by the area under the demand curve of an individual. This calculation is monetary but was initially defined by Marshall as regards surplus value. It is a measure of how the consumer benefits from being able to buy a product at a particular price, net of the sacrifice which he needs. Nevertheless, a variety of critiques are made of Marshall’s doctrine on surplus demand, primarily due to different difficulty associated with this calculation. 

The first critiques of Surplus measurement techniques are: 

1. Constant Marginal Utility of Money 

The theory of Marshall about surplus consumers is based on the idea that capital is continuously being utilized moderately. To allow a person to pay a given price for something if he is poor rather than wealthy needs a stronger motivation. The value of a pound is the least enjoyment or happiness for a wealthy man or a poor man of any sort.  

If a customer spends more, his stock of money decreases and his total value of money rise. Such a drop in the aggregate utility of resources would inevitably require a study of services from previous product units! 

2. Failure to accurately measure 

It is not feasible to accurately quantify demand surplus because we do not realize the future costs that the market is willing to pay for prior products. Indeed, the price of individual demand for precious commodity units is merely imaginary and hypothetical. Prof. Nicholson also argues that the idea of excess demand is only abstract and more figurative than empirical.

3. Surplus measurement difficulties for consumers: 

There are further problems when we try to increase the consumer surpluses of a group or community by adding the excess of different people to the consumption. These difficulties arise because the price of a particular product varies from person to person due to wealth, taste, desires and so on. 

4. Unrestricted consumer surplus in need

It is also remembered that in cases of needs and traditional necessities of life, the surplus of the market cannot be determined, because its value for the customer is limitless or unspecified. It is very often found that a consumer, when he needs these goods, can sometimes pay anything in his possession, making individual demand prices for the products infinite.  

5. Fairly significant consumer goods 

In the case of articles of visible consumption, Tausig pointed out that the concept of consumer surplus cannot be applied. 

Products purchased as status symbols are of high value for their customers, however as costs decline their usefulness decreases. In such instances, a decline in prices leads to the reduction in consumer surplus an inconsistency with the definition of the excess of the consumer.

6. Major Cardinal Utility absurdity 

Marshall’s theory of the surplus user is focused on an essential principle to quantify and enumerate the utility of a product. However, several recent scholars found that cardinal tests and quantifications cannot be seen as a psychological term. 

7. Difficulties in case of supplements and substitutes 

Again, in the case of complementary goods the consumption surplus cannot be measured because, in these cases, the usefulness of something depends not only on its total stock but also on the supply of other goods connected with it. Marshall tried to resolve this issue by suggesting that the related rights should be regarded as one product and combined under one specific demand schedule. In reality, though, that cannot be achieved. 

Conclusion 

It is the best way to view the consumer surplus as a means of expressing the profit to the consumer, as a result of a fall in prices, in terms of money income. Therefore a consumer gets the same amount at a lower price when something goes more cheaply as a result of a drop in their price. Due to such a money gain, he can buy more of thatSurplus measurement, or he can purchase something else; he will be better off now than before in any case. The consumer's surplus is such a gain in money income due to the decrease in the price of a thing.


References:

https://www.economicsdiscussion.net/consumers-surplus-2/consumers-surplus-with-diagram-economics/25150

https://www.investopedia.com/terms/c/consumer_surplus.asp

https://owlcation.com/social-sciences/Consumers-Surplus-Meaning-and-Measurement

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Aug 17, 2020

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