How does marginal utility theory explain the concept of consumer surplus?

Marginal utility theory explains the concept of consumer surplus by analyzing the relationship between the price of a good or service and the satisfaction or utility derived from consuming it. Consumer surplus refers to the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay.

According to marginal utility theory, individuals make rational decisions based on the principle of diminishing marginal utility. This principle states that as a consumer consumes more units of a good or service, the additional satisfaction or utility derived from each additional unit decreases.

When a consumer purchases a good or service, they compare the price they are willing to pay (based on the utility they expect to derive) with the actual price in the market. If the consumer's maximum willingness to pay exceeds the market price, they experience consumer surplus.

Consumer surplus occurs because the consumer is willing to pay more for the good or service than what they actually have to pay. The difference between the maximum price the consumer is willing to pay and the actual price paid represents the additional utility gained from consuming the good or service at a lower price.

For example, let's say a consumer is willing to pay $10 for a cup of coffee based on the utility they expect to derive from it. However, the market price for the coffee is $5. In this case, the consumer experiences a consumer surplus of $5 ($10 - $5), as they are able to purchase the coffee at a lower price than their maximum willingness to pay.

Marginal utility theory also explains that as the price of a good or service decreases, the consumer surplus increases. This is because a lower price allows consumers to purchase more units of the good or service, leading to higher overall utility. As a result, the consumer surplus expands.

In summary, marginal utility theory explains consumer surplus by considering the relationship between the price of a good or service and the satisfaction or utility derived from consuming it. Consumer surplus occurs when the consumer is willing to pay more for a good or service than the actual market price, resulting in additional utility gained from the lower price.