The law of declining marginal utility is the source of the idea of the consumer’s surplus. Talk about it.
The concept of consumer’s surplus is derived from the law of diminishing marginal utility. Discuss.
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The law of declining marginal utility is the source of the idea of the consumer’s surplus. Talk about it.
Consumer's Surplus and the Law of Diminishing Marginal Utility
Consumer's surplus is a concept closely related to the law of diminishing marginal utility. This economic principle states that as a consumer consumes more units of a good or service, the additional satisfaction (marginal utility) derived from each successive unit decreases.
Basis in Marginal Utility: Consumer's surplus is the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount they actually pay. It is derived from the law of diminishing marginal utility because it is the diminishing satisfaction that leads consumers to value each additional unit of a good or service less than the previous one.
Willingness to Pay: Initially, a consumer may be willing to pay a high price for a good due to high utility derived from the first units. As consumption increases, their willingness to pay decreases, aligning with the law of diminishing marginal utility.
Calculation of Surplus: The consumer's surplus is represented graphically by the area under the demand curve and above the market price. It quantifies the benefit to consumers in monetary terms, arising because they pay less for each unit than what they would have been willing to pay, based on their initial utility assessment.
In summary, consumer's surplus is inherently linked to the law of diminishing marginal utility, as it is the decreasing marginal utility that underpins a consumer's decreasing willingness to pay for additional units of a good or service.