Value and Utility1.We may now turn to consider how far the price which is actually paid for a thing represents the benefit that arises from its possession.This is a wide subject on which economic science has very little to say, but that little is of some importance.
We have already seen that the price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it: so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price; and he thus derives from the purchase a surplus of satisfaction.The excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction.It may be called consumer's surplus.
It is obvious that the consumer's surpluses derived from some commodities are much greater than from others.There are many comforts and luxuries of which the prices are very much below those which many people would pay rather than go entirely without them; and which therefore afford a very great consumer's surplus.
Good instances are matches, salt, a penny newspaper, or a postage-stamp.
This benefit, which he gets from purchasing at a low price things for which he would rather pay a high price than go without them, may be called the benefit which he derives from his opportunities, or from his environment.or, to recur to a word that was in common use a few generations ago, from his conjuncture.Our aim in the present chapter is to apply the notion of consumer's surplus as an aid in estimating roughly some of the benefits which a person derives from his environment or his conjuncture.(1*)2.In order to give definiteness to our notions, let us consider the case of tea purchased for domestic consumption.Let us take the case of a man, who, if the price of tea were 20s.a pound, would just be induced to buy one pound annually; who would just be induced to buy two pounds if the price were 14s., three pounds if the price were 10s., four pounds if the price were 6s., five pounds if the price were 4s., six pounds if the price were 3s., and who, the price being actually 2s., does purchase seven pounds.We have to investigate the consumer's surplus which he derives from his power of purchasing tea at 2s.a pound.
The fact that he would just be induced to purchase one pound if the price were 20s., proves that the total enjoyment or satisfaction which he derives from that pound is as great as that which he could obtain by spending 20s.on other things.When the price falls to 14s., he could, if he chose, continue to buy only one pound.He would then get for 14s.what was worth to him at least 20s.; and he will obtain a surplus satisfaction worth to him at least 6s., or in other words a consumer' s surplus of at least 6s.But in fact he buys a second pound of his own free choice, thus showing that he regards it as worth to him at least 14s., and that this represents the additional utility of the second pound to him.He obtains for 28s.what is worth to him at least 20s.+ 14s.; i.e.34s.His surplus satisfaction is at all events not diminished by buying it, but remains worth at least 6s.to him.The total utility of the two pounds is worth at least 34s., his consumer's surplus is at least 6s.(2*) The fact that each additional purchase reacts upon the utility of the purchases which he had previously decided to make has already been allowed for in making out the schedule and must not be counted a second time.
When the price falls to 10s., he might, if he chose, continue to buy only two pounds; and obtain for 20s.what was worth to him at least 34s., and derive a surplus satisfaction worth at least 14s.But in fact he prefers to buy a third pound: and as he does this freely, we know that he does not diminish his surplus satisfaction by doing it.He now gets for 30s.three pounds; of which the first is worth to him at least 20s., the second at least 14s., and the third at least 10s.The total utility of the three is worth at least 44s., his consumer's surplus is at least 14s., and so on.
When at last the price has fallen to 2s.he buys seven pounds, which are severally worth to him not less than 20, 14, 10, 6, 4, 3, and 2s.or 59s.in all.This sum measures their total utility to him, and his consumer's surplus is (at least)the excess of this sum over the 14s.he actually does pay for them, i.e.45s.This is the excess value of the satisfaction he gets from buying the tea over that which he could have got by spending the 14s.in extending a little his purchase of other commodities, of which he had just not thought it worth while to buy more at their current prices; and any further purchases of which at those prices would not yield him any consumer's surplus.
