Consumer Surplus - Activity

The aim of this Activity is to introduce the concept of consumer surplus and look at how this concept can be used in economic decision making and policy making. The concept is abstract. We all spend money, buying all manner of goods and services. The amount we spend on each item might give us some indication of the value of that item to us. Deciding to spend £4.00 going to the cinema can be interpreted as saying we expect to get at least £4.00 worth of value out of that visit - in other words, it represents better value than spending that same £4.00 on a pizza.

Consumer surplus measures the value we get from consumption over and above that which we actually have to pay for the product. Often we have possessions that mean a great deal to us - we say they are of sentimental value. In such circumstances no amount of money might be able to replace the object concerned. In everyday life, however, we also place different values on the things that we own. Consumer surplus aims to assess the value of these items. This is a very important concept in economic decision making.

1. Your teacher will provide you with a list of 5 CDs. In the table below, rank them in order of value to you on a scale of 1 - 10, 10 being the highest and 1 being the lowest. You cannot give 0!
   
   Utility Chart
   
   

   Utility	1	2	3	4	5	6	7	8	9	10
   CD1
   CD2
   CD3
   CD4
   CD5

2. Now we are going to try to place some monetary value on your decisions.
   
   Look at the price list below and place a tick against the price that you would be willing to pay for each CD. For example, if you felt that you would be prepared to pay up to a maximum of £20 to buy the CD by x then tick all the boxes up to £20. Note, this is not asking how much you ACTUALLY pay for the CD but the VALUE you place on it. If you happen think that Coldplay are the best band ever, then you might feel the CD is worth £30 to you in terms of the pleasure it would give you. You will have to assume at this point that you have sufficient income to purchase the items and that you have not already bought it, so we are really trying to assess how you VALUE the CD concerned and make some crude estimate of the value of the benefits it gives to you. It might be worth thinking how much you would want from someone to part with the CD!
   
   Price Chart
   
   

   Price (£)	CD1	CD2	CD3	CD4	CD5
   26
   24
   20
   18
   16
   14
   12
   10
   8
   6
   4
   2
   1

3. Now collect all the information from the whole class and tally the data. From your information construct a demand curve showing the relationship between price and the number of CDs demanded for each CD. This can be done manually on graph paper, or you could insert the information into a spread sheet and use the graphing tool.
   
   Tally Chart
   
   

   Price (£)	No of CD1	No of CD2	No of CD3	No of CD4	No of CD5
   26
   24
   22
   20
   18
   16
   14
   12
   10
   8
   6
   4
   2
   1

4. Having collected your information, you now need to analyse it. Think of the following questions:
   • If the retail price for each of the CDs was £12, how many people in each case would have been willing to pay more than £12?
   • If the retail price were £10, how many people in each case would have been willing to pay more than this amount?
   • If the retail price were £15, what would happen to the number of people who were willing to pay more than this amount?
5. In each case above, calculate the consumer surplus:
   The total value (utility) obtained by consumers is the area under the curve - see the illustration below. Subtract from this total value the total expenditure actually paid out by consumers (the retail price x the number of people buying at that price) The difference between the two is the total consumer surplus.