Alfred Marshall wrote the book “Principles of Economics,” which emphasized that the price and production of goods is determined by both supply and demand. Marshall contributed many original ideas to the study of economics, including his analysis of consumer surplus, price elasticity, diminishing returns and marginal utility.
Supply and demand is one of the most basic laws in economics and most economic events and phenomenon result from the interaction of these two rules. The law of supply states that the amount of goods offered for sale increases as the market price increases, and falls when the price falls. The law of demand states that when the price of a product increases, the demand for it falls, and when the price subsequently falls, the quantity demanded rises. These laws work to help a market find an equilibrium price where a manufacturer can sell everything produced and each consumer can buy all he wants.
Alfred Marshall defined the idea of consumer surplus as the monetary value gained by the consumer when a product’s purchase price is lower than what a consumer would pay rather than not have it at all. The surplus occurs when the consumer is willing to pay more than the current market price for the product.
Marshall used this concept to analyze the effects of taxes and subsidies on changes in well-being, which later became known as welfare economics.