Friday, January 5, 2007

The Dollar Store, consumer surplus and economic joy

Does anyone else love the dollar store? Have you ever gone to one of those "Dollar Stores" and felt really good when you bought something for a dollar that you would of paid much more for?

Where does this economic joy come from? The answer is rooted in your 'willingness to pay'. When we buy something, we rarely ask ourselves (except when we are on ebay) what are we willing to pay for this item. For economists, a person's willingness to pay will determine if we purchase a item (everything from milk to haircut) and how we feel about the purchase price. In other words, if you had to buy a bottle of water at auction on a hot day, how much would you pay? The maximum amount you are willing to bid at auction is your 'willingness to pay'. Think of a really big sale ... need some help? Ok, consider the feeling when you buy a $2 pint of Alexander Keith's at happy hour - something I usually pay $4 for on Friday night. What is wonderful about a sale is that we purchase a good below the price we normal pay. And yes, the 'willingness to pay' price maybe different for every person. In economics, we frame this type of idea as consumer surplus.
This feeling, the one I get when I pay less for something that I was willing to pay, is felt each time I make a trip to the dollar store.

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