Question

When it comes to supply and demand, government policies including trade, consumer and producer surplus play a key role. provide a real example of how consumer and producer surplus is used in the economy and why?

Give and briefly discuss the importance of inelastic and elastic when it comes to purchasing certain goods and or services. Provide a real-world example beyond the text listing a pro and con of each one in your own words.

Answer 1

When supply and demand is considered government policies,trade ,consumer and producer surplus do play an important role in determining it.When consumer surplus is considered it is the difference between what consumers actually pays for a product and what he actually intended to pay.Consumer surplus reflects the utility of consumers.Consumer is able to get a surplus when he is able to buy a product a price lesser than what he was actually willing to pay.

The concept of consumer surplus has an important application in economic theory.One such example is consumer surplus is used in explaining the water-diamond paradox and the concept of consumer surplus is used to evaluate the loss and benefits resulting from tax.Using consumer surplus we can evaluate the benefits and loss from subsidies and tax to consumers.When a subsidy is introduced by the government it will benefit the consumers .The buyers or consumers need to buy a product at a lesser price due to imposition of subsidies. This is an example of consumer surplus.

Producer surplus is defined in terms of producers perspective .It is the difference between the amount what sellers or producers are actually willing to sell their product and what they actually receives.Difference between the supply and market price is producer surplus.Real example of producer surplus .Selling luxury cars can be taken as an example of producer surplus.Manufactures of luxury car will make only limited numbers .Suppose there are 2,000 luxury cars in the economy and the normal price is 100,000 but when the economic conditions improve and when more consumers are willing to buy the car producers will charge a higher price and increase the price to 150,000 and thus this difference (150,000-100,00) 50,0000 is the producer surplus.

Elasticity and inelasticity of goods and services plays an important role in determining the demand for goods and services .For elastic goods the demand is price elastic it means that when price increased the demand for goods decreases.Where as for inelastic goods the demand is price inelastic.
An example of elastic goods and inelastic is Dell products and apple products.Dell products are price elastic which means that when price of Dell products increases consumers will reduce the demand for dell products where as apple products are considered to more price elastic.Eventhough the price of apple products increases consumers will buy it and there is no much change in demand.