The Importance of Consumer Surplus
Consumer surplus îs measure of the welfare that people gain from consumption of goods & services, - measure of benefits they derive from exchange of goods,
Consumer surplus îs difference between total amount that consumers are willing & able to pay for good - service (indicated by demand curve) & total amount that they actually do pay (i,e, market price for product), The level of consumer surplus îs shown by area under demand curve & above ruling market price as illustrated în diagram below:
Consumer surplus & price elasticity of demand
When demand for good - service îs perfectly elastic, consumer surplus îs zero because price that people pay matches precisely price they are willing to pay, This îs most likely to happen în highly competitive markets where each individual firm îs assumed to be a ‘price taker’ in their chosen market & must sell as much as it can at ruling market price,
In contrast, when demand îs perfectly inelastic, consumer surplus îs infinite, Demand îs totally invariant to price change, Whatever price, quantity demanded remains same, Are there any examples of products that have such low price elasticity of demand?
The majority of demand curves are downward sloping, When demand îs inelastic, there îs greater potential consumer surplus because there are some buyers willing to pay high price to continue consuming product, This îs shown în diagram below:
When there îs shift în demand curve leading to change în equilibrium market price & quantity, then level of consumer surplus will alter, This îs shown în diagrams above, In left hand diagram, following increase în demand from D1 to D2, equilibrium market price rises to from P1 to P2 & quantity traded expands, There îs higher level of consumer surplus because more îs being bought at higher price than before,
In diagram on right we see effects of a cost reducing innovation which causes outward shift of market supply, lower price & increase în quantity traded în market, As result, there îs increase în consumer welfare shown by rise în consumer surplus,
Consumer surplus can be used frequently when analysing impact of government intervention în any market – for example effects of indirect taxation on cigarettes consumers - introducing of road pricing schemes such as London congestion charge,
Related Tags: Economics Macroeconomics, Microeconomics at ExpertsMind.com
Consumer surplus îs measure of the welfare that people gain from consumption of goods & services, - measure of benefits they derive from exchange of goods,
Consumer surplus îs difference between total amount that consumers are willing & able to pay for good - service (indicated by demand curve) & total amount that they actually do pay (i,e, market price for product), The level of consumer surplus îs shown by area under demand curve & above ruling market price as illustrated în diagram below:
Consumer surplus & price elasticity of demand
When demand for good - service îs perfectly elastic, consumer surplus îs zero because price that people pay matches precisely price they are willing to pay, This îs most likely to happen în highly competitive markets where each individual firm îs assumed to be a ‘price taker’ in their chosen market & must sell as much as it can at ruling market price,
In contrast, when demand îs perfectly inelastic, consumer surplus îs infinite, Demand îs totally invariant to price change, Whatever price, quantity demanded remains same, Are there any examples of products that have such low price elasticity of demand?
The majority of demand curves are downward sloping, When demand îs inelastic, there îs greater potential consumer surplus because there are some buyers willing to pay high price to continue consuming product, This îs shown în diagram below:
When there îs shift în demand curve leading to change în equilibrium market price & quantity, then level of consumer surplus will alter, This îs shown în diagrams above, In left hand diagram, following increase în demand from D1 to D2, equilibrium market price rises to from P1 to P2 & quantity traded expands, There îs higher level of consumer surplus because more îs being bought at higher price than before,
In diagram on right we see effects of a cost reducing innovation which causes outward shift of market supply, lower price & increase în quantity traded în market, As result, there îs increase în consumer welfare shown by rise în consumer surplus,
Consumer surplus can be used frequently when analysing impact of government intervention în any market – for example effects of indirect taxation on cigarettes consumers - introducing of road pricing schemes such as London congestion charge,
Related Tags: Economics Macroeconomics, Microeconomics at ExpertsMind.com
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