The Importance of Consumer Surplus

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,


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The Origins of Game Theory

The Origins of Game Theory ?

The initial foray into seeing such interaction as a game of strategy was taken up by John Van Neumann and Oskar Morgenstern in the late 1920s. In 1944, they published ' The Theory of Games and Economic Behaviour'. In their own words, they were attempting to look at the debate on exchange from a different perspective - that of a game of strategy. Following publication of this work, a number of academics, including mathematicians, took up the idea and as a result, game theory has become an accepted part of the theory of economics.

Its relevance to economics is extensive. It is relevant to the study of, amongst other things:

Market structures, specifically oligopolies
Market entry and exit strategies
Market equilibrium
Decisions on location (for example, decisions on outsourcing or locating in areas where there may be government assistance)
Auctions: for example, the government's decision to auction licences for third generation (3G) mobile phones
Public goods provision
Decision making at major national, European and international summits
Mergers and takeovers
Pricing strategies
Investment decisions

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What is Game Theory?

What is Game Theory?

Game theory îs essentially theory of decision making, Economics îs about tension that exists between scarce resources & unlimited wants & needs, As result, we all have to make decisions, In making decision, there îs going to be some form of benefit & associated cost - opportunity cost,

Underpinning all of economics, therefore, îs process of exchange - two - more individuals - organisation/institutions etc, bargaining for exchange for some mutual benefit, However, în process of this exchange there are different levels of benefit & cost, The product of economic activity, of which exchange îs basis, has to be divided amongst various groups involved, It has been said that there are three fundamental questions relating to economic activity:


What îs to be produced?

How will ît be produced?

Who will get what îs produced?

We can look at economic activity în terms of cake - cake îs output of economy but who gets what proportion îs dependent on variety of different things, Game theorists have applied their minds to understanding how human interaction will affect how cake îs divided up,


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Game Theory

Game Theory

This latest resource for students of economics în 16-19 age group looks at game theory,
Game theory îs not new - first steps în field were taken back în 1920s - but over years, Game Theory has become increasingly important part of research & thinking în subject, Interestingly, despite its importance în economic theory, there îs only one awarding body în UK that makes reference to game theory în its current specifications - AQA, Despite this, there îs no reason why students at this level should not be aware of basics of game theory & to incorporate understanding of game theory into responses în examinations,


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What is Microeconomics ?

What is Microeconomics ?

Microeconomics (from Greek prefix micro- meaning "small" + "economics") îs branch of economics that studies behavior of how individual modern household & firms make decisions to allocate limited resources, Typically, it applies to markets where goods - services are being bought & sold, Microeconomics examines how these decisions & behaviours affect the supply & demand for goods & services, which determines prices, & how prices, în turn, determine quantity supplied & quantity demanded of goods & services,

This îs în contrast to macroeconomics, which involves "sum total of economic activity, dealing with issues of growth, inflation, andunemployment,"Microeconomics also deals with effects of national economic policies (such as changing taxation levels) on aforementioned aspects of economy, Particularly în wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'microfoundations' — i,e, based upon basic assumptions about micro-level behavior,

One of goals of microeconomics îs to analyze market mechanisms that establish relative prices amongst goods & services & allocation of limited resources amongst many alternative uses, Microeconomics analyzes market failure, where markets fail to produce efficient results, & describes theoretical conditions needed for perfect competition, Significant fields of study în microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory, Also considered îs the elasticity of products within market system,

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What is Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services.
The term economics comes from the Ancient Greek.

Political economy was the earlier name for the subject, but economists in the latter 19th century suggested 'economics' as a shorter term for 'economic science' that also avoided a narrow political-interest connotation and as similar in form to 'mathematics', 'ethics', and so forth.
A focus of the subject is how economic agents behave or interact and how economies work.
Consistent with this, a primary textbook distinction is between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents (such as households and firms or as buyers and sellers) and markets, and their interactions. Macroeconomics analyzes the entire economy and issues affecting it, including unemployment, inflation, economic growth, and monetary and fiscal policy.

Other broad distinctions include those between positive economics (describing "what is") and normative economics (advocating "what ought to be");
between economic theory and applied economics; between rational and behavioral economics; and between mainstream economics (more "orthodox" dealing with the "rationality-individualism-equilibrium nexus") and heterodox economics (more "radical" dealing with the "institutions-history-social structure nexus").

Economic analysis may be applied throughout society, as in business, finance, health care, and government, but also to such diverse subjects as crime,
education, the family, law, politics, religion, social institutions, war, and science.

At the turn of the 21st century, the expanding domain of economics in the social sciences has been described as economic imperialism.


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