Wednesday, May 29, 2013

Consumer Surplus Is Everywhere

People tend to complain that goods are really expensive or even over-priced. Such good are actually very few; most goods come at great deals. They are just so common, we tend not to notice them.

Consider my bed. Less than two years ago, I paid Ikea $400 for a mattress and box spring. It's incredibly comfortable and still in great shape. Since I'm moving in a couple of days, I'm giving it away (I need to get rid of it quickly). Did I get my money's worth?

Over the past 21 months, I've spent about 16 months sleeping in my apartment (the rest visiting my fiancee during breaks). That means that bed cost me $25 per month, or less than a dollar a night (about 83 cents). On any night, I would have easily spent ten times that amount to avoid sleeping on the floor. I would probably go as high as 15 times (or $12.50). Thus I received $6,000 (or, 15 times $400) - $400 = $5,600 in "consumer surplus." I don't really think of this bed as costing $400. I think of it as giving me a net of over $5,000.

I assume most of you have never calculated your consumer surplus (the most you are willing to pay minus how much you actually paid) for your bed. I bet you haven't done it for your electricity, Internet access, gasoline, or toilet paper. Anything you buy without thinking too much about if you should buy it are items you get a lot of surplus from. Take a moment and estimate your consumer surplus from one of these items. You'll find a lot of stuff is really cheap.