Question dilkie Finance & Economics

Effect of change in demand on consumer surplus

explain the likely impact on consumer suplus of a change in demand

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Answer Expert #26026

As a concept the importance of consumer demand and supply play a vital role in business economics. Research conducted by Buvik (2001) states that the relevance of consumer demand plays a critical role on the overall market and consumption of a product. Consumer surplus refers to the gap between the price that is paid by the consumes compared with the value of the product. Besanko (2012) highlights that as a concept, consumer surplus allows firms and markets to understand the welfare gain from consuming various goods or services. A key measure utilised by various organisations is effectively using consumer surplus to set the pricing of products. This is linked with the change in supply based on demand and introduces the concept often termed as ‘price discrimination’ enabling firms to control the price of a product based on consumer interest and developing a producer surplus in the process.

As the demand curve shifts the overall level of consumer surplus also changes. A higher supply cost essentially reduces consumer surplus while an increased demand causes the consumer surplus to rise. This means that as the demand of a commodity rises, the consumer surplus as the willingness to pay for a product or service also increases indicating a rise in consumer surplus. (Besanko, 2012)

References

Besanko, D. (2012) Economics of Strategy, 6th Edition, New York: Wiley


Buvik, A. (2001) "The industrial purchasing research framework: a comparison of theoretical perspectives from micro economics, marketing and organization science", Journal of Business & Industrial Marketing, Vol. 16 Iss: 6, pp.439 - 450