Business | Investment
Where has all the consumer surplus gone?
Last Monday my wife called to tell me her car had broken down in the middle of the road. Much to the embarrassment of our children, the car had opted to stop right in front of their school gate.
- By Babu Das Augustine, Banking Editor
- Published: 23:47 January 9, 2009
Last Monday my wife called to tell me her car had broken down in the middle of the road. Much to the embarrassment of our children, the car had opted to stop right in front of their school gate.
The car has been a family shame for some time. Over the past few years the rickety machine had developed an uncanny ability to ruin whatever you could associate with a happy family life.
Last year after such an incident forced us to abort a family picnic (with my in-laws in tow) on Al Ain highway, I had sworn to my family that I would find an appropriate solution. I did the research, found the right car and even talked to a bank to finance it. But there was a small hitch.
After paying a huge mortgage, budgeting for a 40 per cent increase in rent, 30 per cent hike in school fees and a similar increase in grocery and utility bills, there wasn't simply enough room to squeeze in a new car loan.
I successfully sold the inflation story to my wife and got the new car project shelved. Although I had been getting subtle reminders in recent months, I always managed to change the topic in time. But with the latest incident, the car has once again surfaced as a frequent subject on the dinner table. I can almost sense a revolt shaping up at home.
Well, inflation is not a credible story any more. Although we are yet to see any tangible decline in many components of cost of living, such as rent, school fees or utility bills, with the economy in the middle of a slowdown, prices are definitely on decline.
Most retail chains already have sale boards hanging on the shop windows. Some car dealers too have announced discounts on prices.
Even though the prices are genuinely down, I am still undecided about the new car simply because the sheer pleasure of buying something cheaper has been obliterated by the fear of the unknown.
The concept of consumer surplus identified by Jules Dupuit (1804-1866) and later developed by Alfred Marshall (1842-1924), assumes that the price paid by consumers for a good or service never exceeds and seldom equals the amount they are willing to pay rather than forgo it.
The value of consumer surplus is the difference between the amount that consumers are willing and able to pay for a good or service and the total amount that they actually do pay.
As per the theory, a fall in price should definitely enhance the value of consumer surplus. Of course, factors such as lower elasticity of demand and absence of a substitute should enhance the degree of pleasure of consumption.
In my case the demand for a car is highly inelastic and in current circumstances public transport is hardly a substitute to a car.
Yet the idea of buying a car simply doesn't appeal to me. I think the overall consumer behaviour around the world reflects my dilemma.
Just like the irrational exuberance of boom inflated asset prices and encouraged conspicuous consumption, fear of the unknown is holding back all consumption decisions, sometimes, even a legitimate necessity backed by perfectly inelastic demand.
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