## ipm1988 3 years ago The basic definition of Consumer Surplus is that consumer surplus is basically the extra price which the consumer is willing to pay for a product over its original price asked by the seller now lets take an example I smoke and the price of one packet of cigarettes is Rs.110 and if I run out of cigarettes in the middle of the night then I go to a shop where they charge me Rs.140 for the same packet of the Cigarettes. Now according to the definition my Consumer Surplus would be Consumer Surplus = 140-110 = Rs 30 Is my conclusion right ?

1. anjali_pant

Well I dont think so. It is so because , earlier your willingness to pay was 110 , but now since the price of cigarettes has risen up , you dont earn any consumer surplus. Had it been , say 80 , then CS=110-80. So first decide your willingness to pay , then see what you actually pay , and if your willingness to pay exceeds what you actually end up paying , then that amounts to Consumer Surplus.Pardon me , if my suggestion proves wrong.

2. ipm1988

@anjali_pant The price of cigarette has not risen up the same cigarette which I purchase from any tobacco shop costs me Rs.110 while in the night when I am out of cigarettes the only people who are selling cigarettes are the tea vendors who charge Rs. 140 for the same packet of cigarette which if I had purchased from tobacco shop would have costed me Rs.110

3. anjali_pant

Well I dont think it has any relevance with consumer surplus , then. When you talk about consumer surplus , you keep your reference stationary.Or even if you include some tea vendor , then you first have to decide your maximum willingness to pay. I'll give you one example: Say there is a one of a kind Ferrari that you would like and you are willing to pay \$100,000 dollars for it, but you only end up paying \$75,000. Your consumer surplus is \$25,000. If the price of the goods (Ferrari) increases to \$90,000, your consumer surplus is now \$10,000. Now coming back to your case. You initially bought a cigarette packet from tobacco shop for Rs.110 , assume that is your maximum willingness to pay, or even if it is not , lets say it is Rs.120 , then you earn CS=Rs.10. Now in another shop , tea vendor , the same thing is available for Rs.140, if your max willingness to pay is 110, you will not earn CS, even if its Rs.120 , you'll not earn CS. Had it been Rs. 150 , you would have earned CS=10. So as I said earlier decide your max willingness to pay , see what you actually pay , then conclude how much surplus you earned.

4. ipm1988

@anjali_pant that makes more sense thanks