Page 64 - DECO405_MANAGERIAL_ECONOMICS

Unit 4: Consumer Behaviour (Utility Analysis)

did not cut down production in the first two months, their sales were down by a massive 19.8 Notes
per cent. The entire industry was reeling under the liquidity crunch last year. The effects of
this do not seem to have worn out as evident from sales figures. With the general economy
not picking up, the demand for the heavy vehicles too has come down. In such a situation a
cut in production might be very pronounced in the coming months in this segment.
The light commercial vehicle segment was no different either. Boosted by the sales of Tata
'Sumo' last year, the light commercial vehicle segment has already shown signs of its
inability to sustain the tempo. Though 'Sumo' continued to do well and improve its
market share, the players in this segment cut down production by about two per cent.
However, the effect on sales was even more significant as it dipped by nearly 9.5 per cent.
No different was the case of luxury cars either. Although the car segment as a whole was
able to post a growth in sales of 2.6 per cent, for the second time in a row the luxury car
segment was able to grow only in single digits. Now that the base has widened much
more, the days of a double digit growth in any of these segments is a near impossibility.
Table 1: Production and Sales in April-May 1996-98
Production Variation Production Variation
1997-98 1996-97 1997-98 1996-97
HCV 216.30 211.53 2.25 154109 192272 -19.80
LCV 21870 22293 -1.89 18682 20617 -9.38
Cars 60593 60415 0.29 58850 57360 2.59
Utility Veh. 71083 71239 -0.22 69471 69216 0.37
Scooters 189414 220645 -14.15 191457 211233 -9.37
Motor cycles 172703 140659 22.78 168337 136916 22.93
Mopeds 92470 10701 -13.59 89122 100969 -11.73

Question
How did slowdown affect the can industry?

4.6 Consumer Surplus

Consumer surplus is the satisfaction that a consumer obtains from a good over and above the
price paid. This is the difference between the maximum demand price that buyers are willing to
pay and the price that they actually pay. A related notion from the supply side of the market is
producer surplus.

Example: Suppose, for example, that Rahul is willing and able to pay 30 for a packet of
chips. This is his demand price. However, the going market price, the actual price that everyone
pays for a packet of chips is 25. While Rahul is willing and able to pay 30, he pays only 25.
He receives a 5 consumer surplus on this purchase.

A comparable surplus from the supply side of the market is producer surplus. It is the revenue
that a producer obtains from a good over and above the price paid. This is the difference
between the minimum supply price that sellers are willing to accept and the price that they
actually receive.

Example: Suppose that ABC Chips Producer is willing and able to accept 20 for a packet
of chips. This is its supply price. This is what it needs to receive to cover production cost.
However, the going market price, the actual price that everyone pays for a packet of chips is 25.
While ABC Chips Producer is willing and able to accept 20, it receives 25. It receives 5
producer surplus on this sale.

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