Apr 102017
 

To get the most out of our spending we can take advantage of consumer surplus. A consumer surplus occurs when we, as consumers, are willing to pay more for something than the actual market price. For example, I pay about $50/month for parking at work. Since I drive to work everyday, being able to use the parking lot is fairly important to me. Given how essential this privilege is, I would be willing to pay up to $125/month for parking. 🙂

The difference between how much I value the parking space versus how much I actually pay is the consumer surplus, which is $75 in this case. If the cost of parking was over $125/month however, then I would take public transportation instead of driving to work.

In order to increase our perceived wealth and live a richer life, we should try to allocate more of our spending towards products and services that will bring us greater marginal benefit.

Here are a couple of ways to increase our consumer surplus:

  • Practice mindful spending.
    Lots of people buy clothes, exercise equipment, or magazine subscriptions often on impulse. But realize after awhile that they don’t actually use those things very much. We should minimize buying things that won’t give us a consumer surplus. We have to know ourselves and take some time to consider how much utility a product will give us not only at the moment of the purchase, but also in the future.
  • Earn more money.
    The more income we make the more affordable things will be for us, relative to other consumers. A taxi ride to the airport may seem expensive to someone making minimum wage. But the same fare would be pocket change for an engineer making $140,000 a year. My cell phone plan was $40/month 10 years ago. That seemed expensive to me as a student. Today, my cell phone plan is still $40/month. But I would be willing to pay $300/month for it. So my consumer surplus is $260, making it an excellent deal for me.

Consumer Surplus in Everyday Life

Some people complain we have expensive telecommunication services here compared to other countries. This is true, but measured from a consumer surplus perspective the cost of internet and phone services is not that bad. 🙂 Evaluating a product based on what other people are willing to pay for it is natural. But it puts us at risk of buying something not very useful or enjoyable to us. Here’s a joke to prove this point.

Husband: I just bought this bag of dog food for 90% off. I couldn’t pass up such a great deal!
Wife: But we don’t have a dog.

We all have different values and interests. So if we spend money with a higher priority on maximizing consumer surplus then we can enjoy more bargains in life. 🙂

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4 Comments on "Maximizing Value with Consumer Surplus"

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vivianne
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I remember I was making decent money here in the US, visiting my friend and she was having unlimited data plan, etc while making $500/mo. she doesn’t seem to mind it at all. 🙂 Here I was paying $20/year using magicjack. But I was paying $120/mo for parking, it’s now $150/mo for parking. The bus would have cost me $30/mo, but why waste 1.5 hours on the bus when I can be at work in 17 mins?

FI3000
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Your husband/wife joke kind of sums up my view of the consumer masses. I always get a chuckle when you’re at the checkout and the cashier thanks you and tells you how much money you “saved” today.

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