Q.Explain the theory of "Consumer's Surplus".

Consumer's surplus (Alfred Marshall) is the excess of the price a consumer is willing to pay over the price he actually pays; it exists because of diminishing marginal utility.

Meaning. The concept of consumer's surplus was developed by Alfred Marshall. A consumer is often willing to pay more for a commodity than he actually has to pay in the market. This gap between the potential price (willingness to pay) and the actual price (market price) is the consumer's surplus — a measure of the extra satisfaction or gain the consumer derives from a purchase.

Consumer's Surplus = Potential price - Actual price

Why it arises. Because of the law of diminishing marginal utility, the consumer values the first units of a good more highly than later units. But in the market he pays the same (market) price for every unit. For all the earlier units he was willing to pay more than the market price, so he enjoys a surplus of satisfaction over what he pays.

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