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Consumers Manufacturers And Efficiencies of Markets

 Consumers Manufacturers and Efficiencies of Markets

Consumer Surplus – Willingness To Pay

            We are going to see the four feasible consumers’ willingness to pay. For instance, the below table represents the optimum price rate that every of the four feasible consumers would pay.


Consumer

Willingness to Pay

A

$50

B

$40

C

$30

D

$20

         The above given data represents the bidding rate of the purchase of antique A, B, C and D. Each of them would like to own the antique however there is a limit to the amount that each is willing to pay for it.

         Each consumer’s maximum is called the willingness to pay and it measures how much that consumer values the commodity. Each consumer would be enthusiastic to purchase the antique at a cost less than his willingness to pay and he would refuse the antique at a cost greater than his willingness to pay.

         At a cost paritying to his willingness to pay the consumer would be likewise about purchasing the commodity: if the price is same as the value he places on the antique he would be equally happy buying it r keeping his money.

         To vend the antique we start the bidding at a low price say for instance $5. As all consumers are willing to pay much more, cost rises quickly. The bidding stops when A bids $40 or may be a little more.

         At this point, B, C and D have dropped out the bidding as they are not willing to bid any more than $40. A pays $40 and gets the antique. Note that the antique has gone to the consumer who values the antique most highly.

         What benefit does A get from consuming the antique? In a sense A has found a real bargain: He is willing to pay $50 for the antique but pays only $40 for it. We say that john receives consumer surplus of $10.

         Consumer surplus is the amount buyer is willing to pay for a commodity less the amount the consumer actually pays for it. Consumer surplus measures the benefit from participating in the bidding as he pays only $40 for a commodity he values at $50. B, C and D get no consumer surplus from participating in the auction as they left devoid of antique and not paying anything.

Cost and the Willingness to Sell

            Presume that a customer wants his house painted. And the customer has four options to select the paint service renders such as M, N, O and P. Every paint service vendor who provides painting service is willing to do the work for the customer if the price is correct. It’s the discretion of the customer to select a vendor for who conducts an auction among the paint vendors who will do their service at a lowest cost.

            Every painter is willing to take the job if the price would surpass his cost of doing the service and the cost here to be taken as the paint vendors’ opportunity cost that includes expenses for paint, brushes etc. as well as the charge that the painters place on their own time.


Vendor

Cost

M

$400

N

$300

O

$200

P

$100

            The above table shows every painter’s cost. Since a painter’s cost is the least price he would accept for his work, cost is a measure of his willingness to sell his services. Every painter would be keen to vend his service at a rate higher than the cost and he would refuse to sell his services at a price less than his cost.

            At a price precisely paritying his cost he would be indifferent about vending his services but would be equally glad getting the job or walking away without incurring the cost.

            When the bid is taken from the painters the price might begin high but swiftly drops as the painters compete for the job. Once the painter ‘P’ bid $100 or a bit lesser she is the sole remaining bidder.

            The other painters deny to go any lesser than $200 hence ‘P’ gets $200 for doing the job at a cost of $100 which is known as Manufacturers’ or Producers’ Surplus. Producers’ surplus calculates the gain to vendors of participating in the market.

            If suppose the customer has two houses to be painted whilst painter O and P remain the bid and the other two quits, at the price of $300 O gets a producers’ surplus of $100 whilst P gets $200 for the same job. Therefore the total producers’ surplus in the market is $300.

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