Importance of Consumer’s Surplus. From both theoretical and realistic points of view, the notion of the consumer surplus is of immense significance in economics.
Helpful in making economic comparisons:
The idea of the surplus of the market helps one to make economic comparisons between two countries about the health of people. For eg, if Bangladeshi people enjoy a larger amount of market surplus than Central African people, we are justified in concluding that Bangladeshi people are better off than Central African people.
The idea of the surplus of the consumer allows one to compare the advantages and opportunities of the environment, or conjectural advantages. We also come across instances where certain individuals in their system reject incentives because they require posting away from their home town. That is, even with smaller wages, they feel more comfortable with being back at home. In other words, it means they take advantage of the environment and possibilities at home, which could be more than the additional benefit they will receive in a position away from their homes if valued in terms of dollars.
Value-in-Use and Value-in-Exchange distinctions:
The surplus of the consumer sees its key application in describing the discrepancy between value-in-use and value-in-exchange. Items of enormous value-in-use but minimal value-in-exchange (such as water, etc.) offer a greater surplus of pleasure for the user. Ask a motorist with a flat-tyre, for example, how much he would be able to pay to fill up a deflated tire. Just a tip of Tk. 1 paid to the pump boy is the real price he pays for the service. Clearly, the owner of the car gets a high degree of surplus from the customer. Similarly, telephone matchboxes, newspapers, power and water supplies, otherwise no too costly products, provide a high degree of surplus from the market. Therefore, value-in-use can be calculated as being equal to the amount of value-in-exchange and the surplus of the consumer. Value-of-use Value in the Surplus of the Trade Consumer
A monopolist keeps the surplus of the consumer accessible from it while setting the price of his goods. If the commodity in question yields a sufficient market surplus, a high price would be set by the monopolist. On the opposite, if the commodity yields no market surplus, a low price would be set by the monopolist.
Dupuit Flotelling Theorem:
The definition of the market surplus is the ground on which the Dupuit Hotelling theorem has been established. It says that if the monopolist is not afraid of competition or retribution by the producers, he may lift the price of the product produced by the producers to such an extent that the surplus of the entire consumer is wiped out. On the other hand, whether the product of the monopolist has a huge number of alternatives, or even with its distance rivals, whether he fears running into market war, he will charge such a low price as to give the customer some margin of surplus.
- In the field of public finance: The most important application of the market surplus principle is in the field of public finance. When a tax is levied on a commodity, the price of a commodity increases, thus decreasing demand and also the surplus of consumers generated by consumers. Tax, on the other hand, gives money to the state. And where the revenue to the government is higher than the resultant cost of surplus satisfaction to buyers is a product tax justified.
- Direct and Indirect Taxation: The notion of market surplus also presents us with good Oleo / Vocal direct tax claims as opposed to indirect taxes. For example, if a direct tax, say income tax, is levied by the government, the taxpayer will spread his income loss over different pieces of spending to the loss of only a limited amount of marginal utility on each item. The direct tax would not squeeze the tax-pa much in this manner.
- Determination of Subsidies: The idea of the surplus of the market also allows one to evaluate the impact on a sector of a government bounty or subsidy. In order to lower the costs in order to encourage more consumers to consume it, a bounty or discount is issued to the manufacturer of a product, the resulting loss is paid by the government. A subsidy can only be justified if, as determined by the market surplus, the benefit to the consumers is greater than the resultant cost to the state.
- Importance of foreign trade: The notion of consumer surplus also allows one to calculate the advantages of international trade. A nation imports from abroad certain products which are either not available or are in short supply within the region. Owing to the lack of these goods, the citizens of the world are able to pay a high price for them, but they just have to pay their prevailing retail price because of their imports from other nations. In this way, they enjoy the surplus of a consumer. Consequently, all commodities that yield a significant consumer surplus should be imported.
- Economic Welfare: Welfare economists measure the impact of government policy on people’s welfare on the basis of the surplus of consumers. The C. theory. S. It is helpful in the cost-benefit analysis of investments such as river crossings, railway connections, lakes, parks, etc. In such projects, the size of the projected consumer surplus is a key factor in decision-making. The government should follow certain economic policies that encourage the surplus of customers, according to Dr. Little. In short, the excess of the market has become a central principle in contemporary welfare economics. C.S. The. S. As the spiritual father of welfare economics, it is considered. Prof. Pigou rightly puts it as, “The engine he (Marshall) has created, while constrained in reach, will also serve us.” In our everyday life, the notion of the market surplus is of tremendous functional significance.
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