Answer to Question #245564 in Microeconomics for notrriley

Question

Given that we do not know the demand schedules, does the concept of consumer surplus have any practical relevance? Or do we have to make assumptions to generate the equation for the demand schedule and then compute the consumer surplus? If so, why not assume the value of the consumer surplus. Examine the sensitivity of the consumer surplus to changes in two of the factors that are assumed as given when computing the consumer surplus.

Answer 1

The concept of consumer surplus will not have any practical relevance with no demand schedules. This is because consumer surpus is a measure of consumer benefits which are found by calculating the area between the demand curve and the price line of the quantity of goods sold. Without the demand schedules, we cannot have the demand curve.

Making assumptions in the generation of the equation for the demand schedule will not yield accurate consumer surplus. The value of consumer surplus cannot be assumed . It can only be determined by the demand curve and the price of goods.

Consumer surplus will always increase as the price of a good decreases and it will reduce as the price of a good rises. Consumer surplus is zero where the demand for a good is perfectly elastic and it is infinite where demand is perfectly inelastic. Consumer surplus can be computed either on an individual or aggregate basis, depending on if the curve is individual or aggregated.