Is consumer surplus subjective?

Question

The producer surplus is objective because the it is the total revenue minus the total variable cost. For example, if the producer sold 100 goods at 5 each, and the total variable cost was 300, then his surplus is 200. The total revenue and variable cost is object because it is numerical, a seller can not change these numbers based on his own perceptions or feeling.

But the demand curve is different from consumer to consumer, the consumer surplus is defined as The difference between the value that a consumer places on units purchased and the amount of money that was required to pay for them. The consumer places on the good is entirely subjective, therefore is it correct to say how big your consumer surplus is entirely up to the individual consumer? And even for the same consumer, the consumer's value placed on a good can change from time to time, for example, the value I place on going to see a movie on a date with a possibility of getting laid later that night is much higher than the value I place on going to a movie by myself even thought the product is exactly the same. But my two consumer surplus would have a enormous difference.

Answer 1

Yes it is subjective. But subjective valuations are where demand curves come from (at least for final goods and services). Consumer surplus is simply a measurement of aggregate willingness to pay so it is subjective (like utility) and measured in currency units (unlike utility).

For example, if a movie ticket is for sale for ten dollars and you'd pay up to 15 dollars to see it then your consumer surplus is five dollars. This valuation is purely subjective. Another consumer could have a different maximum willingness to pay for the ticket. If you thought the movie was going to be less entertaining or had something else fun to do the maximum you'd pay would be lower and so would the consumer surplus.

One area of this that once confused me is the units. Utility functions typically are discussed as though they were in units of utils but utils cannot be compared across people. However, willingness to pay, which is an implication of the budget constraint and preferences implied by household utility functions, is measured in currency and can be compared across people. That is, it is sensible to say "you would pay more to see Iron Man IV than I would" but not "you would get more utility from seeing Iron Man IV than I would".

So it isn't exactly as @Kitsune says, that consumer surplus is utility minus price. Rather, consumer surplus is willingness to pay minus price, which are both in currency units and can be aggregated over and compared across consumers.

Answer 2

In the case with the movie tickets you give, the movie ticket is no longer the only good being considered; it's a bundle of both the movie ticket and the expected value of the date. There will be separate consumer surpluses for each of these aspects.

It's also important to note that the producer surplus can be subjective. Part of the cost of building something could be time, the opportunity cost of doing something else which may have a subjective intrinsic value to that person.

Mathematically, we measure consumer surplus using utility minus price, which puts some sort of value on a good. It makes things a little more, "objective" per se. You should also note that, while the consumer surplus is in a way based on subjective preferences, it's still theoretically measurable by observing purchases.

Answer 3

In some more complex approaches, authors and economists explore a bit of the consumer utilities to consider other variables to the problem, and, thus, they regularly add more expressions than just utility minus price. The same goes for producer surplus, as Kitsune Cavalry suggested.

I recently completed my master's thesis, entitled "Pharmaceutical Regulation and Pseudo-generics". There is preference in that industry, so I wanted to consider that as well. I read a lot of papers and concluded that many authors used the Hotelling line to characterize the consumer's preference space. That line reflects all those inexplicit variables, including taste, brand love, and so on. Of course, those things are still subjective as you suggest, but they are considered by a negative transportation cost. On the other hand, explore personal preferences can be very painful, but not impossible. It may require some sort of empirical research before proceeding with any theoretical thoughts. The same goes for the supply side of the market. To explore specific problems, we can definitely add more variables to contemplate specific scenarios. Look at this paper, for example, although I am not sure if you have free access to it.

These are just examples of how can we explore these functions in more complex models, to answer specific questions. My thesis was aimed to a specific problem, so I prepared the entire model according to that problem - meaning that I considered relevant variables and relevant problems.

Perhaps teaching how these things work in general require that they keep things simpler and may be misleading.