Question

Why do you think it is difficult to estimate a demand curve in reality? Explain.

Give three examples of goods or services that you believe may have high levels of consumer

surplus. Explain the logic for each.

Answer 1

Demand curve analysis is based on the assumption that a consumer is rational and his preferences are transitive. He makes decision based on cost - benefit analysis. That means if he chooses A over B and B over C, then he will always choose A over C.

But the reality is far from this. There are external factors like fashion, taste, preference which keeps on changing and thus makes difficult to estimate a demand curve.

Consumer Surplus is the difference between maximum willingness to pay and price. It is high in case of public goods where a consumer pays a negligible price. Eg, Usage of Public Park, public transport, Water, etc