Some firms can capture this consumer surplus by charging the highest price that consumers would be prepared to pay, rather than charge price P for all units consumed. As utility falls, the price that consumers are prepared to pay declines, causing the demand curve to slope down from A to B. Therefore, in the above diagram, as consumption rises from zero, at C, to Q, marginal utility falls. A very thirsty consumer will be prepared to pay a relatively high price for their first soft drink, but, as they drink more, less utility is derived and the price they would be prepared to pay falls. One explanation for this is the law of diminishing marginal utility, which suggests that the first unit of a good or service consumed generates much greater utility than the second, which generates greater utility than the third and subsequent units. Declining consumer surplusĬonsumer surplus generally declines with consumption. A producer is a person who makes goods or provides services. Ask students to repeat after you and define consumer. This net gain is called consumer surplus, which is the total benefit, area ABQC, less the amount spent, area PBQC. A consumer is a person who buys and uses goods and services. This means that there is a net gain to the consumer, because area ABQC is greater that area PBQC. The amount consumers actually spend is determined by the market price they pay, P, and the quantity they buy, Q – namely, P x Q, or area PBQC. For example, at price P, the total private benefit in terms of utility derived by consumers from consuming quantity, Q is shown as the area ABQC in the diagram.
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