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Usefulness of the Concept

1- The concept draws attention to the fact that the total utility derived from the consumption of a thing is usually greater than the price paid for it.
In other words it reveals the difference of value-in-use and value-in-exchange. It helps in the assessment of enjoyment of real income.

2- Consumer's surplus indicates the benefit a person derives from the economic environment in which he lives. We can compare different localities by
estimating and comparing the consumer's surplus obtained in each locality.Get Any Types Previous Years Questions Papers Available Here. The higher the
consumer's surplus, the more advanced is the economy.

3- This concept is useful in Public Finance for judging the relative merits of different types of taxation. A tax, generally, raises prices and reduces
consumer's surplus. Against the disadvantage can be set off the advantage accruing to the Government in the form of revenue. If the gain to them is less
than the loss of consumer surplus, the tax is a bad tax; if the converse obtains, it is a good tax.

4- The concept is useful in determining monopoly prices. A monopolist can charge different prices from different consumers according to the consumer
surplus earned by them.Get Now All Types Placement Papers Here.


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Limitations

1- Consumer's surplus cannot be measured precisely because it is difficult to measure the marginal utilities of different units of a commodity consumed
by a person. Online Aptitude Test Available Here Now.


2- In the case of necessaries, the marginal utilities of the earlier units are infinitely large. In such case the consumer's surplus is always infinite.

3- The consumer's surplus derived from a commodity is affected by the availability of substitutes. Online Quiz Available Here.


4- There is no simple rule for deriving the utility scale of articles which are used for their prestige value.

5- Consumer's surplus cannot be measured in terms of money because the marginal utility of money changes as purchases are made and the consumer's stock
of money diminishes.

6- The concept can be accepted only if it is assumed that utility can be measured in terms of money or otherwise.

Ordinal Utility

The ordinal utility theory of consumer behaviour is referred as the indifference curve analysis. The indifference curve approach was developed by Edge worth
but Prof. Hicks And Allen explained this concept in detail.

Law of Demand

Other things being constant, quantity demanded of a commodity is inversely related to the price of the commodity. In other words, when the price of a commodity
rises, demand falls and when the price falls, demand rises provided factors other than the price remain unchanged. Thus, the law of demand indicates an inverse
relationship between the price and quantity demanded of a commodity i.e. with a rise in price, demand will fall and with a fall in price, demand will rise.
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