Essays on Economics Monopoly market

Consumer surplus

Consumer surplus is the benefits and advantages that consumers receive from the consumption or the exchange of goods and services. (Shone 2001, p.28)

Basically it is measured as the difference between the maximum price that consumers are willing to pay for a certain product and the actual market price of it.

The chart demonstrates consumer surplus – it is shown as the exact area that indicated as ABC:

For instance, the real market price of the T shirt is $5, and the equilibrium quantity demanded is 5 units of the good. The market demand curve reveals that consumers are willing to pay at least $9 for the first unit of the good, $8 for the second unit, $7 for the third unit, and $6 for the fourth unit. (Shone 2001, p.30)

But they can purchase 5 units of the good for just $5 per unit. Their surplus from the first unit purchased is therefore $9 – $5 = $4. Similarly, their surpluses from the second, third, and fourth units purchased are $3, $2, and $1. Therefore the sum total of these surpluses is the approximate consumer surplus $10. (Shone 2001, p.30)

Price elasticity of demand

This index shows responsiveness of the quantity demanded of the product in order its price to be changed. Price elasticity of demand shows a percentage change in quantity demanded in response to a one percent change in price. (Buchanan, 1977, n.a.)

It should be noted that although the changes in price and quantity move in the different directions in the majority of the cases, they are rarely indicated with the minus.

The demand is elastic relating to price if the price elasticity of demand is more than 1; it means that demand highly depends on the changes of price;

The demand is relatively elastic if the price elasticity of demand equals 1;

The demand is inelastic if the price elasticity of demand is lower than 1, it means that demand doesn’t depend on the changes of price. (Shone 2001, p.30)

Firstly I would like to show the example of elastic market (please loot at the chart below) which shows the number of packets of detergent a seller will sell for any price. Unfortunately for the seller it appears that consumers are not loyal to the bran; so in the case of the increase in price, the majority will not continue buying this brand and will switch to its competitors. The demand is elastic on this market because there a few big competitors and their products do not have any substantial advantages for the consumer.

The second example is the opposite, it demonstrates us the situation that takes place on the inelastic market:

This time the chart shows the market of a certain kind of souvenirs, for instance, let’s say Olympic souvenirs, and there is only one producer (and seller) of these goods. Therefore, these goods are exclusive, and the consumer may purchase it only from this specific producer. It means that the number of people that will buy these Olympic souvenirs will not be significantly lower in the case the prices increases

Opportunity cost

The opportunity cost was introduced in 1914 by Friedrich von Wieser. It’s the cost of any activity measured in terms of the value of the best alternative (in comparison with a second best choice). (Bergin 2005, p.55)

The opportunity itself is very important element in the efficiency calculations and analysis.

As an example I can suggest the following chart which describes the opportunity cost of the most needed things: food and cloth.

For instance the opportunity cost is the distance between B and C is equal to25 units of clothing.

As for the personal example, for instance a person may have a choice between going for a holiday and buying a new computer (their costs are equal).