Consumer Surplus

MANAGERIAL ECONOMICS DISCUSSION 2 ISRAEL JIMOH

Consumer surplus is the difference between the total amount that consumers are willing to, and able to pay for a good or service and the actual amount paid (i.e. the market price). On the other hand, producer surplus is the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. In other words, producer surplus is an increase in profit gained when the market price is greater than the minimum a firm would be prepared to supply for.

Consumer surplus occurs whenever the price a consumer actually pays is less than they are prepared to pay. For example, as an ardent shopper at Macy’s, my expectations are always exceeded at their seasonal sales. Case in point, I walked away with a sport coat and a two-piece suit last week from their semi-annual sale at 60% off.

Monopoly and Perfect Competitive Market exemplify two extremes on a continuum of market structures. At the one end is pure competition, representing the high efficiency of an industry characterized by free market entry and exit, homogenous products and perfect knowledge. At the other extreme, monopoly, epitomizes some efficiency brought about by market control and entry barriers into the market.

However, since efficiency can be productive or allocative, a firm is said to be productively efficient if it produces at the lowest possible unit or average cost, i.e. MC = AC. Allocative efficiency refers to a situation whereby suppliers are producing the optimal mix of goods and services desired by consumers. A firm in a pure market is allocatively efficient if its marginal cost is equal to its average revenue. On the other hand, unlike perfect competition, the monopolist does not achieve productive or allocative efficiency, because it produces at a level to induce higher prices at lower outputs. Conversely, a perfect market will produce at a price and quantity where the industry supply meets the...