Consumers' surplus Essay Example | Topics and Well Written Essays - 1250 words

Consumers spare - Essay ExampleThe low major insight that students obtain from the study of microeconomics is the theory of implore and supply. Nevertheless, the demand is the willingness and ability of individuals of consumers to acquire accredited dependables and ser crimes. Therefore, when prices increase (assuming determinants of demand constant) the quantity demanded decreases and vice versa, thereby resulting in a downward sloping demand curve due to negative price quantity relationship. In contrast, the supply refers to willingness and ability of mete outers to produce and sell certain goods and services. Hence, when prices increase (assuming determinants of supply constant) the quantity supplied also increases because of increase in profit margin of producers and vice versa. In simple words, the supply curve slopes upward due to positive price quantity relationship. In this paper, I would elucidate on Consumer surfeit a theory contributed by Alfred Marshall in twent ies (and derived by using the downward sloping demand curve) that initially received various serious admonition by then economists and academicians. Dooley (1983, p. 26) has summarized the following major criticisms raised at that time - First, whether an additive utility procedure adequately explains consumer behavior second, whether the marginal utility of money can be treated as a constant third, whether the quantity demanded of one commodity can be treated as a act of its price alone and fourth, whether it is possible make interpersonal comparisons. The researcher will first explain what Consumer Surplus theory is after which an analysis will be presented on the credibility of this theory. The researcher will adjudicate this paper by providing a personal opinion and will finally provide 2 recommendations to the economists and pundits. 2. analysis / Body Consumer Surplus is a concept studied in microeconomics and it refers to the estimation of consumer utility. In simple wor ds, consumer surplus is the surplus portion calculated by subtracting the maximum price consumer wants to pay for acquiring a good or service with the equilibrium grocery price. This could also be defined as the difference amidst the actual paid market price and the highest price at which demand of a crossway exists. As illustrated in Figure 1, the equilibrium quantity and price are P1 and Q1 respectively however, the demand of a product also exists at higher prices. Therefore, the blue portion represents consumer surplus. Figure 1 In order to to the full comprehend the theory of Consumer Surplus, I would like to present an example of demand of videodiscs (video games) relative to their price. In this case, permit us consider that aconsumer enters in a Computer shop to buy video games. The consumer buys 10 DVDs of $50 in total but he is inclined to pay $95 for one DVD so the consumers surplus for 1 unit will be $45, for 2 units will be $40, for 4 units will be $30, for 6 units will be $20, for 8 units will be $10 and for 9th unit will be $5 only. The figure 2 illustrates the consumer surplus in green, which is below the market demand curve and above the equilibrium market price. Figure 2 Samuelson & Nordhaus (2005, p. 96) highlights the following Consumer Surplus is the gap between the total utility of a good and its total market value