Question

What is the definition of “willingness to pay?”Whatis the definition of “willingness to accept?”If the price of chocolate eclairs is $3, and Joe chooses to buy four eclairs a week, is his expenditure of $12 on chocolate eclairs the same as his “willingness to pay”? If not, what is the difference?

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Answer 1

Willingness to pay :- It is the maximum price that a buyer can give to acquire any product as per his valuation. So if the product is provided at a price lower than or equal to willingness to pay then the buyer would buy the product.

Willingness to accept :- It is the minimum price that the seller or provider of resource can accept in exchange for his product. So if he gets any amount greater than or equal to this he can sell his product.

As Joe purchases four eclairs at $12 means he is paying as per the market price of $3 per eclairs. He may have a value eclairs at a higher price than $12 for four eclairs which makes up his willingness to pay. Hence, this expenditure of $12 is not same as his willingness to pay.

His willingness to pay may be greater than $12. So whatever extra he saves by buying it at $12 is known as his consumer surplus.