Provide an example of an item where you capture a lot of consumer surplus (you w

Question

Provide an example of an item where you capture a lot of consumer surplus (you would be willing to pay much more than the going price for the product) and one where you capture little consumer surplus (the price you pay is about the maximum you would be willing to pay). In each situation, explain what the maximum price you would be willing to pay for the product is and the resulting size of your consumer surplus. Do you think the producers overall have a relatively large or small producers surplus for each product and why?

Explanation / Answer

Consumer Surplus:- It is defined as the difference between the total amount that he consumers are willing to pay for a good or service and the total cost that they actually do pay (ie. market price)

The consumer surplus of water is immense while that of diamonds is low.Now the supply curve of water shows that water is abundant and so its price is low. Thus when the market for water reaches equilibrium at point Ew , the total expenditure on water is the area OPwEwQw which is on the low side.

The supply curve of diamonds makes irt scarce and accounts for its high price. Thus when the market for diamonds reaches equilibrium at point Ed its price is quite high. So total expenditure on diamonds is OPdEdQd.

The supply and demand curves for water intersect at a very low price while supply and demand curve for diamonds intersect at a very high price and hence equilibrium price of diamonds is very high. This is because diamonds are very scarce and the cost of getting an extra one is very much on the high side while water is relatively abundant and costs little in most parts of the world.

Producers surplus is the value their products derive from transactions.For eg . If a producer would be willing to sell a good for $4 but he is able to sell at $10 than he acieves a producer surplus of $6.Yes , there is a relatively small producer surpus for each product as there is lot of competition in the markets with regard to price and the best competitive price is accepted by the market.

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