Consumer surplus

2011-06-13

in Economics

One advantage of big corporations is that size and focus can allow them to be efficient. Having a bunch of amateurs manufacture one lightbulb would be quite an undertaking. The same goes for untrained individuals trying to do things like file complicated taxes or cut their hair. When you have a group of trained people with appropriate support doing the task in large volumes, the difficulty and cost can be reduced.

Some of that benefit goes to the corporation in the form of producer surplus. This is the difference between what it costs them to provide a good or service and what price they are able to sell it for. If an iPad costs $200 to make and Apple can sell it for $500, their producer surplus is $300.

There is, however, another side to this coin. Products are often cheaper than the maximum price consumers would be willing to pay for them. I might be willing to pay $750 for an iPad, and be happy to find they only cost $500. That $250 is a consumer surplus that I can use for other purposes.

The relative size of the consumer and producer surplus depends on the shape of the supply and demand curves. In some situations, most of the difference between production cost (which includes things like the costs associated with the retail sale of items) and sale price will go to the corporation. In other situation, most of the surplus goes to the consumer.

In either case, the efficiency of the corporation contributes to the size of the overall surplus, and therefore to the opportunities for both parties to benefit. General Electric producing 1,000,000 compact fluorescent bulbs and selling them for $2 a piece produces a lot more benefit for a set quantity of inputs than having each of us try to make them for ourselves using whatever glass and mercury we have lying around.

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{ 2 comments… read them below or add one }

Milan June 13, 2011 at 11:33 pm

Producers of informercials understand this concept:

“How much would you pay for ALL OF THIS?

Five hundred dollars?

A thousand dollard!?!

It can all be yours for just five easy payments of $39.99!”

. July 3, 2011 at 10:50 am

IBM v Carnegie Corporation
The centenarians square up
Both IBM and the Carnegie Corporation will turn 100 this month. Has the multinational business or universal philanthropy done more for society?

Jun 9th 2011 | NEW YORK | from the print edition

“ONE simple way to assess the impact of any organisation is to answer the question: how is the world different because it existed?” That is the test set out by Sam Palmisano in the foreword to a new book celebrating the 100th birthday of IBM, the firm he has run since 2002. But another organisation is also turning 100 this month—the Carnegie Corporation of New York, a flagship of American philanthropy. Mr Palmisano’s insight is too good to limit to only one of the centenarians. A better question is: which has done more for the world, one of its leading companies or one of its most influential charities?

At first glance, IBM and the Carnegie Corporation seem to be engaged in such different endeavours that comparing them might seem about as sensible as comparing apple orchards and orange groves. Making money has always been the main aim of the company formed in 1911 by the merger of three small producers of mechanical accounting machines, scales and time recorders, and renamed International Business Machines 13 years later. By contrast, the Carnegie Corporation explicitly set out to create a better world by giving away what remained of the great fortune of its industrialist founder, Andrew Carnegie. Yet both can assert that they have made the world a better place during the past century, and it is far from obvious which claim is stronger.

The answer matters, and not just in order to award the historical bragging rights. Comparing the records of those giants of 20th-century American capitalism—or “philanthrocapitalism”—can shed light on a question that is keenly debated today: whether philanthropy or business is more effective at “Making the World Work Better”, to borrow the title of the book celebrating IBM’s centenary.

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