...Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139 Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139 The Heinz School of Public Policy and Management, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213 erikb@mit.edu • yuhu@mit.edu • mds@cmu.edu Erik Brynjolfsson • Yu (Jeffrey) Hu • Michael D. Smith W e present a framework and empirical estimates that quantify the economic impact of increased product variety made available through electronic markets. While efficiency gains from increased competition significantly enhance consumer surplus, for instance, by leading to lower average selling prices, our present research shows that increased product variety made available through electronic markets can be a significantly larger source of consumer surplus gains. One reason for increased product variety on the Internet is the ability of online retailers to catalog, recommend, and provide a large number of products for sale. For example, the number of book titles available at Amazon.com is more than 23 times larger than the number of books on the shelves of a typical Barnes & Noble superstore, and 57 times greater than the number of books stocked in a typical large independent bookstore. Our analysis indicates that the increased product variety of online bookstores enhanced...
Words: 10789 - Pages: 44
...Consumer Surplus [pic] When analyzing changes to a consumer optimum given changes in the market price of a particular commodity, we often speak of the consumer being better or worse off. What is missing in this analysis is the ability to quantify changes in individual satisfaction due to these price changes. One method used to measure these welfare changes is through the use of a concept known as Consumer Surplus. This method compares the value of each unit of a commodity consumed against the price of that commodity. Stated differently, consumer surplus measures the difference between what is person is willing to pay for a commodity and the amount he/she actually is required to pay. Consumer demand is a measure of willingness to pay. As shown in the diagram below, consumers often value each additional unit consumed less that previous units (i.e., the concept of diminishing marginal utility). For example, suppose that the good in question is monthly consumption of gasoline. Based on the data in the diagram below (left), the consumer would be willing to pay $9 for the first gallon rather than to without. This first gallon would be used for essential driving activities. Each successive gallon has a value to the consumer of $1 less than previous units (2nd gal = $8.00, 3rd gal. = $7.00, and so on) as needs are met and the consumer engages in driving more for pleasure and sight-seeing. The value that the consumer places on each gallon (unit) consumed is summarized by the individual...
Words: 1700 - Pages: 7
...Consumer Surplus and Producer Surplus Consumer Surplus – Difference between what the consumer is willing to pay for an additional unit of a product or service and its market price. Producer Surplus - Difference between what producers receive for an added unit of a product, and the marginal cost of producing it. For example Mr. ‘A’ wishes to buy CDs. The consumer surplus for Mr. A (an individual) in the CD market is: Price Mr. A’s Demand for CDs Shaded area is Mr. A’s consumer surplus P* Market Price DV=MBV QV* Q The surplus of all consumers is simply the sum of all consumers’ surpluses. For instance total consumer surplus in the market for apartments Price Market Demand for Apartments Shaded area is consumer surplus for all consumers P* Market Price DM=MBM Q* Q Similarly, we can see producer surplus in the apartment market below: Price Market Supply for Apartments SM =MCM P* Market Price Shaded area is producer surplus for market Q* Q In this example, one person may be willing to rent their 1st apartment for $200. Since the...
Words: 2554 - Pages: 11
...Surplus Deficits ECO/372 September 10, 2010 Surplus Deficits A surplus in this economy can be beneficial to many businesses and as a whole society as well. A surplus benefits out society when producers and consumers sell their goods or services to the public. It is known that economic surplus is made up of two parts which are producers and consumer surplus. The producer surplus is the benefit that it receives from doing their service to the public at whatever the market price is at that time, rather than selling their services at a much cheaper rate. A consumer surplus is very different and opposite of that of a producer surplus. A consumer surplus is the benefit that it receives from purchasing their services from the public where they would be willing to pay more for the service they purchased. A government budget surplus can be very beneficial to the economy. A government budget surplus can be beneficial in that it gains revenue through taxes and other fees associated with the surplus. A budget surplus does have its effect on the economy in how the government officials use their funds. Two periods in time that comes to mind where the United States had to run their budget surpluses is the War in Iraq from 2003 to 2011, and the September 11th, 2001 attacks in New York at the World Trade Center. According to “A History of Surpluses...
Words: 728 - Pages: 3
...Economics of Daily Life Economics of Daily Life Economics is a study of how society manages its scarce resources. The literal translation for economy is “one who manages a household.” “In an increasingly complex world connected by social and economic interaction and interdependence, news of stock market fluctuations, consumer confidence scores, and various economic indicators fill the media” (Broome & Preston-Grimes, 2011). This means that economics is everywhere, even in a home. Every household makes decisions that follow the economic principles. There are tradeoffs, and incentives. Supply and demand regularly show up in a household setting, as do decisions regarding limits on price and time. I am a single mom and the science of economics is a daily occurrence, at the grocery store, while doing homework, and in my choice of home and bills. Economics is an inevitable part of most people’s daily lives. It occurs in every facet of home, work, and school. There are ten principles to economics. They are the decisions that need to be made in regards to the jobs that need to be done, and the management of the resources that will allow the necessities to be provided. One of the principles that occur most in my daily life is tradeoffs. Tradeoffs occur when a person has to choose between one thing and another, forgoing one desirable option, for the more beneficial, sometimes undesired option. In a study done in 2011, a Montessori middle school set up a school store. Some...
Words: 1224 - Pages: 5
...$650,000 | $225 | $200 | 200,000 | 7,550,000 | Industrial Version | Large Corps + R&D Labs + Consultants | 27,000 | $450,000 | $600 | $565 | 500,000 | 14,305,000 | Multiple Version CSC should offer student version at $50 and industrial version at $1950. Maximum net contribution can be achieved when the 'heavy users' and 'light users' are served separately. Heavy users, though they are smaller in size have higher WTP. The price for the industrial version has to be set at $1950 because otherwise the R&D and labs users will buy only student version as their consumer surplus is maximum there. So, to incentivize these customers, we lower the price by exactly the consumer surplus these users will get - $50. Large MNCs will buy the industry version at $1950 as their surplus is maximum at $550. In the same way, consultants, small business and students will all buy at $50 as their consumer surpluses are $150, $125 and $0 and also because they don't have another option. The total net contribution in this case is $20.58 million. Modeler Version | Market Segment | Size | Segment Dev Cost | Price | Unit Contribution | Product Completion Cost | Net Contribution | Student Version | Consultants + Small Bus + Students | 535,000 | $700,000 | $50 | $15 for students, $35 others | 100,000 | 7,925,000 | Industrial Version | Large Corps + R&D...
Words: 316 - Pages: 2
...problems of administration which are the subject matter of economics. Firstly, one of the problems of administration is to make sure complete utilization of scarce resources, because incomplete utilization may cause dissatisfaction to human beings. Secondly, in cases where these scarce resources are fully utilized, there is still an ongoing administrative problem of allocating the resources as required by the different uses to satisfy various wants and needs. In such a case, when scarce resources are completely utilized, a complete satisfaction of any one want can only be gained at an incomplete or lesser satisfaction of other alternative wants and needs. Another problem of administration of the resources includes the distribution among the consumers of the resources or good/service produced with the use of...
Words: 7798 - Pages: 32
...factor of production which were in favor of the USA have depleted. The reason for this change is due to the emergence of other competitors such as India and China. Those products, services, and facilities which were generating revenue for Mexico are now challenged by the countries like China and India. The reason for this shift is due to comparatively higher wages, unrest in society, corruption in government, and underdeveloped infrastructure. This is further accelerated by phenomena of globalization which removed many trade barriers between east and west. 2. Consumer surplus is the amount a buyer is willing to pay for a product minus the amount the buyer actually pays. Consumer surplus is the area below the demand curve and above the market price. Whereas, producer surplus is the amount a seller is paid for a product minus the total variable cost of production. In the case of producer surplus, producer surplus is equivalent to economic profit in the long run. The sum total of An economic welfare is a sum...
Words: 1179 - Pages: 5
... This project analyses the Minimum Support Prices (MSP) applied by Government of India. Justification for the MSP applied to wheat is also given. Finally measures to reduce the MSP expenditure are given. | Table of Contents 1 Introduction 4 1.1 What is a Minimum Support Price? 4 1.2 What is the need for MSP? 4 1.3 How Government decides MSP? 4 1.4 List of product that receive MSP 5 2 MSP Policy of Wheat 6 2.1 Introduction 6 2.2 How did MSP policy of wheat come into picture? 6 3 Justification of MSP for Wheat 8 4 MSP Pricing of Wheat – Higher or Lower 10 4.1 High MSP – Increases Inflation 10 4.2 Low MSP – Farmer’s Income Affected 10 5 Critical Analysis of MSP Policy 12 5.1 Consumer Surplus 12 5.2 Producer Surplus 12 5.3 Deadweight Loss 13 5.4 Other Effects 14 5.4 Measures to minimize MSP expenditure 16 Bibliography 18 1. Introduction 1.1 What is Minimum Support Price (MSP)? Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the competitive equilibrium price for the crops. A price floor, which is also referred to as a minimum price, sets the lowest level possible for a price. Price floors/minimum prices only have an effect if they are set above the actual market clearing price. There are many instances of governments in the real world setting price floors, such as setting a national minimum wage for labour to ensure that individuals are able to earn...
Words: 4528 - Pages: 19
...to 6 after the tariff. The price increases from $6 to $8 for someone to buy a wingding in the US, which means the quantity demanded domestically is now 18 and the quantity supplied domestically is 12, which is only a shortage of 6 units that needs to be supplied. C. How did the imposition of the tariff change consumer surplus? The tariff decreased consumer surplus by the area with height 8-6 and base y = 26 and base z= 18. The area of this can be calculated by splitting the area into a rectangle and a triangle. The rectangle has an area of (8-6)x18=36 and the triangle has an area of (1/2)x(26-18)x2=8. Adding the two the consumer surplus went down by 44. D. How did the imposition of the tariff change producer surplus? Producer surplus increased after the tariff, by the area with height 8-6 and base y=6 and base z=12. The area of a trapezoid is just [(b1+b2)/2]xh, which is [(6+12)/2]x(8-6)=[18/2]x2=18. The producer surplus goes up by 18. E. What is the overall result of the tariff in terms of welfare? The tariff will lead to deadweight loss, which means that total welfare will be smaller than it was before the tariff. This is because the consumer surplus went down by 44, and 18 of that went to the producers. The tariff will generate revenue for the government, which is just $2...
Words: 396 - Pages: 2
...the rain, miserable, Rick realizes he should have been more rational and: A. ignored his sunk cost of $1200. B. ignored his sunk cost of $1000. C. paid a lawyer $1200 to get his money back. D. offered to give the trip to his life-long best friend. 3. Excludability matters because it: A. allows owners to set an enforceable price on a good. B. allows consumers to control the price of a good. C. creates a perceived scarcity that causes buyers to have an inelastic demand for the good. D. creates a perceived scarcity that allows the seller to keep the price artificially high. 4. If Janice earns $50,000 a year and pays $500 in taxes, and Cam earns $100,000 a year and pays $20,000 in taxes, the tax system must be: A. proportional. B. lump-sum. C. progressive. D. regressive. 6. If the players in the figure shown act in their own self-interest, then we know that Adidas will earn: A. $2 million. B. $6 million. C. $10 million. D. $8 million. 7. When we say that a country enjoys gains from trade, we mean: A. the total consumer surplus increased in the country. B. the net gain of surplus is positive for that country. C. the total...
Words: 2403 - Pages: 10
...Ethan Tremblay Strayer University Eco 400 Prof Elkhana Faux Karl Marx On Our Recession I am choosing Karl Marx as my reference and using his theories to try to form a subjective view of how he would try to explain the problem that is ongoing in the financial global recession. He would blame the recession do to the Overproduction of the system and its struggled to sell it all. Marx would have been bold in his prediction that a host of problems in the current system (capitalism) namely overproduction, declining rates of profit, class inequality and speculative bubbles would inevitably produce a serious global recession. Marx would argue that since the development of capitalist monopolies around the world at the end of 19th century, there has been a systematic tendency toward stagnation in businesses. Monopolies have eliminated competition, set prices to increase their profits, but do not invest in expanded reproduction (new factories, new technology, new machinery), and therefore the economy tends to face a problem of low growth. Overproduction as Marx would call it is transformed by reformist theorists into under consumption, the idea that the mass of workers are paid too little to buy back what they did produce. This surely leads to the program of persuading owners to advance their own interests by paying the workers more. Those workers will then be able to consume and purchase more, and thereby crises will be forestalled or dampened. Marx would say that overproduction...
Words: 733 - Pages: 3
...“Adam Smith’s Work as it Applies to Modern Society” By Mour August 25, 2011 Referenced Book: Wealth of Nations by Adam Smith Adam Smith was a visionary; He described the issue of the Wealth of Nations in twofold, why a society driven by self-interest can exist on the other hand, describes how the “System of natural liberty” appeared and how it works. Book 1 – Of the Division of Labor The World as today The wealth of an industrial nation is the power of labor and the division thereof in order to increase the input of all type of production. Smith explained “The division of the Labor” does not originate itself from human wisdom or of a plan, but is the consequence "of a certain leaning natural one to all the men, that the door to do business and exchanges something to another. And the motivation of this tendency to the exchange is not the benevolence, but the personal interest, that is to say the desire to improve his living condition for the better. Smith concept of wages of labor is a fundamental metrics to satisfy the effort required to produce goods and manufacture a product. The profit (return on sales or investment such as rental properties, commercial building and equipment), buy or sale stocks are conceptual means of increasing an owner’s return on investment. Smith demonstrated that the division of labor will add more efficient methods of doing different...
Words: 1822 - Pages: 8
...Introduction Fayol’s 14 principles derive from the circumstance that Fayol felt that management was not well defined. In his striving to change this circumstance he suggested “some generalized teaching of management” to be a main part of every curriculum at places of higher education and even beginning in “primary schools” . Fayol’s dedication to this idea is demonstrated by the fact that after retirement he went on to not just write books about management ideas, but more importantly, he found the Centre For Administrative Studies (CAS) in 1917 in Paris . The CAS mainly functioned as a centre of discussion between professionals from a large variety of professions, in order to further the knowledge and understanding of management principles. Discussion is what Fayol had in mind, when he presented his 14 principles . In Fayol’s own words: “Are they [the principles] to have a place in the management code which is to be built up? General discussion will show”. In the following I will discuss each of his principles under the aspect of a comparison with examples, historic or modern, and in relation to other theoreticians of management, in order to examine how Fayol’s principles hold up as “management code” today. Principle 1: Division of work The idea of division of work, or as Adam Smith called it “division of labour”, in 1776 probably goes back to the beginning of work itself. Fayol recognizes this in considering specialization as part of “the natural order” comparing...
Words: 4716 - Pages: 19
...equilibrium ("What Is Market Equilibrating Process"). This process is also referred to as a circumstance where the supply of a product is precisely equivalent to its demand. As a result, the price remains steady in this situation as there is no surplus or shortage is reflected in the market. The market has reached equilibrium as the supply and demand curves interconnect. At this point, quantity supplied and the quantity that is demanded is equivalent. Surplus and shortages are detected if the market price is higher than the equilibrium price and the quantity supplied is greater than quantity demanded therefore creating a surplus then the market price will fall. For example, retailers often have surplus of inventory that cannot sell therefore the prices are reduced and placed on sale. Since the price has decreased, the product’s quantity demanded will increase until equilibrium is obtained and as a result, surplus drives price down. Also, if the market price is lower than the equilibrium price, the quantity delivered is fewer than the quantity demanded thus producing a shortage. If a surplus is in existence then prices should decrease in an effort to attract extra quantity demanded and minimize the quantity supplied until the surplus is removed. If a shortage is present then prices should increase in an effort to attract extra supply and...
Words: 358 - Pages: 2
