Please completely explain consumer and producer surplus that results from an auction. Thank you :)

Expert Solution

Answer:

Auction:

“A process of buying and selling goods or services by offering them up for bid, taking bids and then selling the item to the highest bidder or buying the item from the lowest bidder is called auction”.

Consumer surplus:

“A buyer’s willingness to pay minus the amount the buyer actually pays.” Here willingness to pay means the maximum amount that a buyer will pay for a good.

How a price change affects consumer surplus:

Buyers always wants to pay less for the goods they pay, a lower price makes buyers of a good better off. During auction when price increases the consumer surplus decreases which can be seen from the diagram. With higher price a smaller number of buyers are willing to buy.

Producer surplus:

“The amount a seller is paid or a good minus the seller’s cost.” Here cost means the value of everything a seller must give up to produce a good.

How a price change affects producer surplus:

Sellers always want to receive a higher price for the goods they sell. When price increases in the auction producer surplus increases which can be seen from the diagram.

Rahul Sunny answered 1 year ago

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