Consumers’ Surplus
Monopoly is undesirable because a monopolist will restrict output and charge more for the product than the opportunity cost of the resources used. To measure the size of the inefficiency due to monopoly, we need to measure the social value of a given quantity of a product. This brings us to the concept of consumers’ surplus.
In the preceding discussion of the difference between marginal revenue and marginal cost, we use the fact that all consumers in the market pay the same price for a unit of output. In a market situation, consumers are usually indistinguishable from one another. It is through market demand that individual demands influence the market price. But market demand merely summarizes the demands of individual consumers. Different individual consumers are willing to pay different amounts for the product. If consumers wore labels describing their individual demand curves, a monopolist could charge different prices to different consumers. Of this price discrimination were possible, consumers could be lined up along the demand curve according to the maximum amount they would be willing to pay.
the consumers taking the first unit of output would be willing to pay P 1 the consumers taking the second unit of output would be willing to pay P 2, and so on. If a monopolist supplier could force each customer to pay his or her personal maximum, the total revenue would be P1 + P2+ P3+ P4. This is the social value of four units of output-the most that consumers would be willing to pay for four units. Since all consumers in fact pay the same price, if four units of output are sold, the total revenue will be 4P4. The excess of social value over purchase price-which consumers would pay if forced, but need not pay because all consumers purchase at one price is consumers’ surplus 4 units of output. In Figure 2-5, this is roughly the area of the triangle above P4 and below the demand curve.
