Summary of week topic of week was discussion of the following: Economics of value creation- creating Value

Summary of week 4

Topic of week 4 was discussion of the following:

Economics of value creation- Creating Value

In this week, we have learned what is consumer and producer surplus , value creation and capturing value, why we need it, how important they are.

What Is Consumer Surplus?

Consumer surplus is an economic measurement of consumer benefits. Consumer surplus happens when the price that consumers pay for a product or service is less than the price, they're willing to pay. It is a measure of the additional benefit that consumers receive because they're paying less for something than what they were willing to pay.

A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.

Consumer value

Consumer value measures a product or service's worth and compares it to its possible alternatives. This determines whether the customer feels like they received enough value for the price they paid for the product/service.

Consumer price

The consumer price index is one of the types of price indices created to measure the average level of price changes for goods and services for a certain period in the economy.

Reservation Price

Reservation price is a restriction on the price of a product or service. On the demand side, this is the highest price a buyer is willing to pay; As for the offer, this is the lowest price that the seller is willing to accept for a product or service.

Economics of Value creation

Combination of reservation price, consumer surplus, opportunity and explanation of Value creation. Economic value added or EVA in corporate finance is one of the methods for evaluating economic profit. EVA is a registered trademark of Stern Stewart & Co, a consulting company.

In the first section, we learned value can be approximated by the customer’s reservation price, the highest price the consumer is willing to pay. And we learned that the difference in this amount and the actual price is consumer surplus. Then we learned that a resource cost reflects the opportunity cost of that resource, its value in its next best use.

To combine these concepts to derive meaning of value creation and to delineate value creation from the related concept of wealth creation.

Value creation takes place when the value derived from resource use exceeds the opportunity cost of those resources in their next best alternative use.