Question

1. Compare and contrast the effects of non-monetary and monetary competition on consumer and producer surplus.

2. Assume that due to quarantining, the supply of goods is fixed, i.e., price has no effect on the quantity available. In this case, does letting the price increase serve a useful function

Answer 1

Monetary competition permits the consumer to get the product at a smaller price, thereby attracting the consumer by offering an opportunity of price saving. Thus, sellers decrease the price of the product in this case.

Non-monetary competition provides non-monetary benefits like providing gifts, bonus, etc. to attract consumers. It has no effect on price of the goods.

figure (a) shows that in non-monetary competition, price doesn't change so, consumer surplus(ABC) and producer (BCD) surplus doesn't change.

In figure(b), Due to monetary competition, the price has reduced from equilibrium price, p* to p*' and consumer surplus has increased from ABC to AGFE and producer surplus has decreased from BCD to GFD.

Thus, non-monetary competition has no effect on consumer and producer surplus whereas monetary competition can change consumer and producer surplus as shown above.

If the supply of goods is fixed, it is vertical and independent of price, then letting the price increase will not serve as a useful function because of zero elasticity of the supply curve.