Often, we are willing to pay more for a product than it actually costs, which is associated with our natural needs and desires. Our capabilities of this kind constitute a separate element in the structure of a healthy market, which we will discuss below.
What does the consumer need?
It is difficult to understand what constitutes a consumer surplus, if you do not fully understand the driving force behind this phenomenon - demand. Everyone knows from economic theory that the latter is the basis of all market relations, since it is only thanks to him that the proposal is generated, and, accordingly, the balance of the circulation of the offered and consumed goods and services.
We are not shy about declaring that the market is driven by the consumer, who, in turn, relies on a number of factors when choosing a particular purchase.
Whoever says anything, but the primary driving force behind the actions of any buyer is their preferred features. No one will ever get what he does not need, so everyone is based on their personal needs.
At the second stage, the buyer maximizes the usefulness and rationality of his acquisition, in other words, brings his desires closer to the equilibrium price-quality indicator.
Of course, this will not do without comparing one’s desires with one’s own financial capabilities, but the next factor follows from this - the cost of a product or service in relation to the proposed substitute goods of other manufacturers.
Now we can answer the question posed earlier: the consumer needs a product that meets its both conscious and subconscious criteria, which are based on both conscious and subconscious factors.
How does a consumer usually behave?
So, we understood what these or those actions of the buyer are based on, but how does this look in practice? Obviously, a potential buyer may be interested in an identical product from several sellers at the same time, but after purchasing it only from one or not making a purchase at all. Why is this happening?
The fact is that often the wishes and needs of the buyer are rational, and each determines the degree of usefulness of a particular acquisition, both for himself personally and for his family members. In addition, each representative of demand has its own threshold of financial restrictions, and if a particular product does not bear the basic need, it is unlikely that there will be able to pay too high a price.
Often, a consumer is looking for a product at a lower cost, but this does not mean that it should be of poor quality. From here one can run a little ahead and note that the surplus of the consumer is the amount of money, which is the difference between the price that the buyer was ready to pay and the one that actually paid. In other words, I found an identical lower-value product from another seller.
Consumer and Market
Do not forget that consumer surplus is primarily an element of the normal market, where there are also such components as supply and demand.
In accordance with the above information, we can conclude that the desire and ability of the buyer to purchase a particular product or service for a certain period of time are a demand phenomenon. The latter depends on a number of factors: socio-cultural and demographic indicators of the market, the level of earnings of the population, the quality of the goods offered, the products of competitors and their value.
In turn, demand interacts with supply, which also depends on various external socio-cultural factors, as well as internal. The latter include the level of expected consumption and the competitiveness of the product on the market.
So what is this - consumer surplus?
Well, we gradually got closer to the key concept of this article, around which, one might say, various causal market processes are developing. So, consumer surplus is as much money as is left in your pocket after this or that acquisition, although you intended to spend it.
We all know from the foundations of economic theory about the laws of the level of utility of a certain good for a unit of population. So, for example, if you wanted an apple, and you bought a kilogram, then with each fruit you eat, its usefulness for you will decrease in the rate of negative arithmetic progression.
The maximum that you can pay for one apple you eat will be, for example, 5 rubles, but do not forget that with each unit the price you offer will be reduced. On the market, you are offered to buy goods at 2 rubles per fruit, and here the cumulative difference between your and the offered price will be a surplus of the consumer. The formula for a more specific calculation of this indicator will be presented below. In the meantime, let's figure out what this phenomenon can affect.
What profit can a consumer get?
It should be noted that consumer surplus is not only the amount of money saved, it is primarily his own profit. For illustrative purposes, let’s draw a graph on which, as the TU curve, we depict the constantly changing utility level of our apple, while indicator C will talk about material costs, the straight line q will indicate the amount of goods. We see that the maximum level of utility coincides with the price only for a certain volume of demand (q 0), and then the angle goes into decline, which suggests that consumer surpluses, starting from this point, are growing.
Thus, we can conclude: the higher the indifference curve rises over the marked contact of indicators, the more profit the buyer will receive from the proposed transaction, and with the funds received he will be able to satisfy his other needs.
Consumer surplus amid aggregate market
So, we have learned how the difference between the expected and actually paid amount of money for a particular product acts on the example of a specific consumer. And now let's look at how surplus consumers can look in the aggregate market. The chart below shows the price of our apples (P) on the vertical axis, and their quantity (Q) on the horizontal axis. In this case, the mark P 0 indicates the level of generally accepted market prices for fruit on average.
By analogy, we draw utility curves along the price axis (they will be individual for each consumer) and determine the profit of each customer in the form of hatched figures.
In the graphic image, everything is extremely simple and clear - there is a certain figure, it represents the desired indicator, but how to find the surplus of the consumer? The formula is quite simple: we need to calculate the area of each figure, well, and then summarize the obtained indicators. The final figure will be the total profit for buyers in the apple market as a whole.
Surplus consumer and producer
If we are talking about the behavioral factor of the buyer, then it will be impractical not to recall some aspects of the seller’s behavioral factors. Do not forget that the surplus of the consumer and the producer are interrelated and, we are not afraid to note, interdependent. At the same time, the latter indicates the difference between the amount of cash that the seller planned to receive from the transaction and the actual proceeds.
In the graph below, line D indicates the price that the buyer is willing to pay, and line S indicates the price that the manufacturer offers. At a certain point, they intersect (a deal is concluded), and the shaded triangles (upper and lower, respectively) indicate the benefits received by the consumer and the so-called costs of the seller’s greater expectation.
How to achieve market equilibrium?
Why does it happen that with any possibilities of the buyer and the seller’s requests they nevertheless join at a certain price and quantity point in order to conclude a deal? And in this case, everyone is satisfied - someone received the proceeds, but someone satisfied their needs, and sometimes, if the budget plan allows, there may also be consumer surpluses, which is also a nice bonus, because the money remained !
All this happens because our market is flexible, in other words, any demand is sensitive to supply, product quality and its value. Moreover, it can be said that purchasing power is much more elastic and adapts to changes in external factors much faster than the seller’s ability.
Therefore, if apples rise in price once, the demand will drop slightly for some time, but will subsequently recover, but if the tax policy regarding the purchase of apples becomes different, then the producer will need much more time to gain their trade turnover.
