The most commonly thought of consumer situation is that of an individual making a purchase with little or no influence from others. However, in some cases a number of people can be jointly involved in a purchase decision. For example, planning a vacation or deciding on a new car can involve an entire family. In other cases the purchaser may just be acquiring a product for someone else who has asked for a certain item. These situations suggest that people can take different roles in what we have defined as consumer behavior.
Some purchase situations involve at least one person in each of these roles, while in other circumstances a single individual can take on several roles at the same time. For example, a wife (initiator and influencer) may ask her husband (buyer) to pick up a box of corn flakes on his shopping trip because their child (user) wanted it. At another time the husband could act as the initiator, buyer and user by purchasing a gym membership for himself.
When it becomes useful to consider only one role we tend to choose the role of the buyer – the individual who actually makes the purchase. This approach is useful because even when told what to purchase the buyer often makes decisions based on purchase timing, store choice, package size and other factors. Therefore, focusing on the buyer while allowing the influence of others in the purchase decision, still gives considerable flexibility while concentrating on one consumer role.
An important finding states that a large number of married men are assuming a wide variety of non-traditional family roles. Not only are men increasingly pushing the shopping carts, but they are exhibiting behavior that differs from that of women. For instance, when husbands do the grocery shopping they may well choose a brand different from the one the wife would have picked.
This article introduces the basic tools of welfare economies, consumer and producer surplus and uses them to evaluate the efficiency of free markets. The forces of supply and demand allocate resources efficiently. Even though each buyer and seller in market is concerned only about his or her own welfare they are together led by an invisible hand to an equilibrium that maximizes the total benefits of buyers and sellers.
A word of caution is in order. To conclude that markets are efficient we made several assumptions about how markets work. When these assumptions do not hold, our conclusion that the market equilibrium is efficient may no longer be true.
First, I assumed that markets are perfectly competitive. In the world, however competition is sometimes far from perfect. In some markets, a single buyer or seller (or a small group of them) may be able to control market prices. This ability to influence prices is called market power. Market power can cause markets to be inefficient because it keeps the price and quantity away from the equilibrium of supply and demand.
Second, the outcome in a market matters only to the buyers and sellers in that market. Yet, in the world the decisions of buyers and sellers sometimes affects people who are not participants in the market at all. Such side effects called externalities causes welfare in a market to depend on more than just the value to the buyers and the cost to the sellers. Buyers and sellers do not take these side effects into account when deciding how much to consume and produce the equilibrium in a market which can be inefficient from the stand point of society as a whole.
Market power and externalities are examples of market failure – the inability of some unregulated markets to allocate resources efficiently. When markets fail, public policy can potentially remedy the problem and increase economic efficiency. When market failure is likely then the policies which are best judged at correcting market failures should be applied.
Despite the possibility of market failure the invisible hand of the market place is extraordinarily important. In many markets, the conclusion of market efficiency applies directly. Moreover our analysis of welfare economics and market efficiency can be used to shed light on the effects of various government policies.
Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay for it and it measures the benefit buyers get from participating in a market.
Producer surplus equals the amount sellers receive for their goods minus their cost of production, and it measures the benefit sellers get from participating in the market.
An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient.
Markets do not allocate resources efficiently in the presence of market failures such as market power or externalities.