They know that people are willing to pay more for convenience.īecause there’s less of a demand for early morning and late-night flights, the airline is able to price fares differently depending on the time of day, even though the cost of flying and fueling a plane from Destination A to Destination B isn’t going to change. Most brand-name goods know that there’s power in a name and people are willing to pay much more to be “on brand” rather than buy a cheaper, almost identical alternative that’s lacking a famous logo.Īirlines are also notorious for price discrimination. In that case, the exact same house is going to cost a lot more if you’re renting during peak tourist season versus the off-season when the renter is desperately trying to prevent the house from sitting empty. This selling strategy involves charging different prices for the same goods or services based on the business’s estimation of the maximum amount they think the customer is willing to pay.įor example, suppose you’re looking at renting a house on the beach for a week. Both are tools enforced by governments when they feel their benefits outweigh their market inefficiencies. Ī social surplus is the sum of consumer surplus and producer surplus.Producer surplus is the difference between the minimum price a producer is willing to accept for their goods or services and the final price they receive. To calculate extended consumer surplus you need to know the difference between the price the consumer is willing to pay and the price at equilibrium on the supply and demand curve, then multiply this by 0.5 the quantity at equilibrium where supply and demand are equal. To calculate consumer surplus you need to know the difference between the cost consumers are willing to pay for a product or service and the actual market price. Markets tend to fluctuate, especially because consumers are able or willing to spend at different price points for any given product or service. You’ve probably seen a basic demand-supply graph used to illustrate the relationship between a product’s market price and the quantity demanded by consumers.Ĭonsumer surplus and producer surplus are important pieces of the equation. Understanding economic supply and demand provides valuable insight into any given market. How To Calculate Gross Profit Percentage.
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