Tuesday, December 29, 2009

The economics of Google Reader, and the $250K Mac

This post from Austin Frakt at The Incidental Economist looks at the producer and consumer surplus of Google Reader, and makes an important point (albeit using made-up numbers) about how value can be created on both sides of a transaction, even for a free product.

My favorite example of consumer surplus is my computer. I paid around $2,000 for my MacBook Pro, plus maybe $1,000 more for third-party hardware and software. But I would have paid much more—probably somewhere between the prices of my car and my house—if no substitutes were available. (It's hard to say that given what I know about how much computers "should" cost, but if I look at it rationally I can see the enormous value I derive from my computer.) The consumer surplus is off the charts.

As Austin writes,

Given the enjoyment and convenience obtained by the multitude of products we use it’s a wonder how little of that full value we actually pay. The rest is consumer surplus.

Given how I use my car and my computer, the computer should cost more. In a world with zero consumer surplus (where each supplier was a perfectly price-discriminating monopolist) my car would cost about what it did but my MacBook would cost, I would guess, around $250,000.

Thankfully we don't live in that world.


Anshu Sharma said...

Now, that's a thought. I fully agree. BTW, somewhat similar logic applies to international trade balances -deficits and surpluses are always not what they seem. :)

Charlie said...

Excellent point--and you're totally right!