Assume that you were ready to buy a custom tailored dress (or men’s suit) and you are prepared to pay up to $200 for it. Also assume that the tailor is prepared to sell that item of clothing for as little as $100. When you arrive at the tailor shop, the posted price for the item is $150. Discuss how this scenario relates to producer and consumer surplus and how such surpluses, if any, affect buying and manufacturing decisions. Discuss any recent purchases you have made and for which you feel that a similar rationale seemed to be at work.
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Producer surplus is computed by finding the difference between the market price and the marginal cost which is the price the producer is willing to sell the commodity. In this case, tailor is the producer of the dress and is willing to sell the dress at only $100. The tailor must have calculated the cost of production and was certain that he/she was going to get a profit from this price(Lipsey, & Harbury, 2010). The dress retail at $150 at the shop which means extra $50 has been added. The difference of $50 is the producers’ surplus and it is the profit the tailor is going to make. On the other hand consumer surplus is described as a situation whereby the consumer actually pay less that he/she was prepared to pay. In this case, the consumer was prepared to pay $200 for men suit but upon reaching the market the men suit was retailing at $150 which is actually less that the price the consumer was prepared to pay.
Recently, I went to the supermarket to purchase iron box and I was prepared to pay $250 for the commodity, but upon reaching the supermarket………………………………………………………………………………………………………………………………………………………………………………………………………………………………….
……………………………………………………Producer and consumer surplus …………………………………………………………………………………………………………………………………………………………………………….