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Lecture 4

ECN 104 Lecture Notes - Lecture 4: Price Floor, Economic Surplus, Demand Curve

Course Code
ECN 104
John Isbister

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Willingness to Pay and the Demand Curve
Willingness to Pay: the maximum price a consumer is prepared to pay for a good -- An
individual won’t buy the good if it costs more than this amount but will be eager to do so if it
costs less
Demand Curve: only a small number of consumers, this curve doesn’t look like the smooth
demand curves
These demand curves are step-shaped, with alternating horizontal and vertical
segments. Each horizontal segment—each step—corresponds to one potential buyer’s
willingness to pay.
Individual consumer surplus: the net gain to an individual buyer from the purchase of a good;
equal to the difference between the buyer’s willingness to pay and the price paid.
Total consumer surplus: the sum of the individual consumer surpluses of all the buyers of a
good in a market.
Consumer surplus a term often used to refer both to individual consumer surplus and to total
consumer surplus.
The total consumer surplus generated by purchases of a good at a given price is equal to the
area below the demand curve but above that price
A fall in the price of a good increases consumer surplus through two channels:
a gain to consumers who would have bought at the original price
a gain to consumers who are persuaded to buy by the lower price
Producer Surplus and the Supply Curve
A potential seller’s cost is the lowest price at which he or she is willing to sell a good.
Individual producer surplus is the net gain to a seller from selling a good. It is equal to the
difference between the price received and the seller’s cost.
Total producer surplus in a market is the sum of the individual producer surpluses of all the
sellers of a good.
The total producer surplus from sales of a good at a given price is the area above the supply
curve but below that price.
Changes in Producer Surplus
When the price of a good rises, producer surplus increases through two channels:
the gains of those who would have supplied the good even at the original, lower price
the gains of those who are induced to supply the good by the higher price
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