Purchasing Power and Definition

Consumer surplus can be defined as the difference between what the consumers are willing to pay for the consumption of a commodity and the actual price of that particular commodity. In any given market, there are acceptable prices for each and every item and the acceptable quantities. Consumers in certain situations tend to drive the price of the commodities high by creating the imprecation that they are willing to pay more above the competitive equilibrium.

Traders have made use of this concept by either segmenting the markets in terms of the purchasing power and practice price discrimination where the consumers are charged differently. In a monopolistic market, the traders capitalize on reducing the consumer surplus to maximize their profits. For instance, consumers can be willing to pay $120 for a commodity valued at $100 thus the consumers surplus is $20 (Tajvan Pettinger, 2008).

Consumer surplus as a concept can be used alongside other concepts such as "Marginal Utility and Market Demand." In explaining the relationship between the concepts, marginal utility is the satisfaction that a consumer derives from the consumption of additional unit of a good or a service. A consumer's ability to purchase more units of a particular commodity can be influenced by the first consumption and the satisfaction attained.

Where the consumption of additional units increases the total utility it is referred to as a positive marginal utility, while a decrease in the total utility caused by the consumption of additional units is referred to as the negative marginal utility. The satisfaction that consumers derive by consuming additional units of a commodity or service varies between individuals.

On a general view, the more a commodity is consumed by an individual the more the utility decreases which explains the law of diminishing marginal utility where the pleasure derived from the consumption of the first unit of a service or a good decreases with the continued consumption of the additional units to a saturation point. Market demand on the other hand is an economic tool that the traders are capable of using to gauge the consumer demands in the market by establishing what commodities are on demand.

The traders conduct their market survey and determine what commodities are in demand and identify their niche in order to stay competitive in the market. Companies spend resources in conducting market surveys where the trends such as the consumer tastes and preferences are some of the key issues considered in order to identify the commodities which can stay relevant in the market for a longer period to sustain the businesses or the need to incorporate the changes in consumer demands to maximize on profitability.

The three concepts are all related, taking into a consideration the consumer surplus, the willingness on the part of the consumer to pay a higher price above the market price for the same commodity can be used to gauge how much of that commodity can be purchased by the consumers. In comparing Marginal Utility with the consumer surplus, both economic terms are used as determinants of how much of a commodity or a service the consumers can buy based on the pleasure and the satisfaction derived per unit of consumption.

Market demand on the overall combines the two concepts whereby it is.