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Consumers’ Surplus intra

Consumers’ Surplus intra - between the two...

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Consumers’ Surplus intra-marginal units are more valuable : This arises from the fact that though the consumer equates utility (the marginal units) with the price, the intra-marginal units are more valuable (a subjective valuation), in terms of utility enjoyed. This has further been explained in Figure 26. In the figure, DD1 is the demand curve. Units of the good have been shown on the horizontal axis and price is shown on the vertical axis. At price OP (i.e. $2) there is consumer equilibrium. The consumer purchases OQ (4) units. His total expenditure is $8 (4 xð 2) which is equal to the area of the rectangle OPRQ. The total utility that the consumer enjoys from the four units purchased is equal to the area DRQO. The difference
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Unformatted text preview: between the two areas would be the area of the triangle DRP (DRQO - PRQO = DRP). This is the surplus satisfaction that the consumer enjoys. The numerical value of the consumers’ surplus in our example is 6 units. However, the geometrical measure of the surplus is somewhat larger. It is equal to the area of the triangle DRP (half the base into altitude) = ½ (PR x PD). PR = OQ = 4 and PD = OD - OP = 6 - 2 = 4. The geometric value of consumers’ surplus is ½ (4 x 4) = 8 which is larger than 6. Consumers’ Surplus is considered a somewhat hypothetical or imaginary concept. It has considerable importance in framing practical policies such as those of taxation, foreign trade , welfare promotion etc....
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