Class Notes (905,041)
CA (538,335)
UTSG (45,721)
ECO (1,632)
ECO101H1 (575)
Jack Carr (83)
Lecture 10

Lecture 10-Consumer Surplus

5 Pages
161 Views

Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

This preview shows pages 1-2. Sign up to view the full 5 pages of the document.
Tuesday, October 20th, 2009.
Consumer Demand Theory
Measures benefit to buyers of participating in a market
1. 5HVHUYDWLRQSULFH³ZLOOLQJQHVVWRSD\´:
Highest price you are willing to pay
2. Consumer surplus:
Difference between actual price and reservation price
3. Rational consumer:
Seeks to maximize consumer surplus
Example: price of shirt, a baseball bat, or a sports ticket: $50
You have $50 to spend
<RXUUHVHUYDWLRQSULFH³ZLOOLQJQHVVWRSD\´
Shirt: $200
Baseball bat: $100
Sports ticket: $25
What will you buy?
Answer: shirt (consumer surplus: $200 - $50 = $150)
Consumer Surplus
Definition: Difference between the maximum a buyer would pay for a good and the
price a buyer actually pays
Example: Market Price $3
P Q Consumer Surplus
7 1 4 (7 ± 3)
6 2 3 (6 ± 3)
5 3 2 (5 ± 3)
4 4 1 (4 ± 3)
3 5 0 (3 ± 3)
2 6 Not Relevant
* Consumer Surplus equals area under demand curve and above the price
www.notesolution.com
5
SS
3
Q
P
DD
1
7
xx
xx
xx
xx
³:LOOLQJQHVVWR3D\´DQG1XPHULFDO([DPSOHRI&RQVXPHU6XUSOXV
1. In numerical example, good is not divisible => Consumer buys 1 unit, 2 units, etc.
(not, say, 1.5 units)
2. DD is not linear
If P > 7, DD = 0
If P > 6, but not more than 7, DD = 1
If P > 5, but not more than 6, DD = 2
(Note: Text, Figures 7.1 and 7.2, the horizontal portion of DD is shown as
a solid line)
³6WHSSH'HPDQG&XUYH
Shaded rectangle: consumer surplus ($4) on first unit purchased
3
1
6
Q
P
DD
2
7
5
www.notesolution.com

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Tuesday, October 20th, 2009. Consumer Demand Theory Measures benefit to buyers of participating in a market 1. 5HVHUYDWLRQSULFH³ZLOOLQJQHVVWRSD\´: Highest price you are willing to pay 2. Consumer surplus: Difference between actual price and reservation price 3. Rational consumer: Seeks to maximize consumer surplus Example: price of shirt, a baseball bat, or a sports ticket: $50 You have $50 to spend Consumer buys 1 unit, 2 units, etc. (not, say, 1.5 units) 2. DD is not linear If P > 7, DD = 0 If P > 6, but not more than 7, DD = 1 If P > 5, but not more than 6, DD = 2 (Note: Text, Figures 7.1 and 7.2, the horizontal portion of DD is shown as a solid line) ³6WHSSHG´'HPDQG&XUYH Shaded rectangle: consumer surplus ($4) on first unit purchased 3 1 6 Q P DD 2 7 5 www.notesolution.com DD Curves: Standard Practice 1. In general, we will assume DD curves are downward-sloping except in numerical examples designed to illustrate consumer surplus. 2. 6ROHSXUSRVHRIWKH³VWHSOLNH´ DD curves is to facilitate calculation of consumer surplus Consumer Surplus equals area under demand curve and above the price Producer Surplus Amount seller is paid ± (less the) VHOOHU¶VFRVW Example: House Painters Individual A will work for $10 per hour (opportunity cost) B will work for $15 per hour (opportunity cost) C will work for $20 per hour (opportunity cost) D will work for $25 per hour (opportunity cost) If market price (wage) is $20, then: A, B, C will work (D will not work) Producer surplus in market: A $20 - $10 = $10 B $20 - $15 = $ 5 C $20 - $20 = 0 $15 P DD 5 Q SS Market Price P = 3 Consumer Surplus www.notesolution.com P DD 10 Q QE Q1 5 17 SS * Producer Surplus = Area below price and above supply curve Total Surplus = Consumer Surplus + Producer Surplus Key Result: Equilibrium in a competitive market maximizes total surplus Ù competitive market is (allocatively) efficient To left of QE, value of buyer > cost to sellers => efficient to increase output To right of QE, value to buyer < cost to sellers => efficient to reduce output P SS _ P Q Producer Surplus P DD QE Q SS www.notesolution.com At Q1, Consumer Surplus = 17 ± 10 = 7 At Q1, Producer Surplus = 10 ± 5 = 5 ,IZH³DGGXS´DOOWKHVXUSOXVHVWROHIWRI4(ZLOOHTXDOTotal Surplus Allocative Efficiency Question: How much, in total, would consumers and producers pay to prevent this market from shutting down? Answer: Consumer Surplus + Producer Surplus = Total Surplus Example: Market for Blue Fox Fur Coat ³:LOOLQJQHVVWRSD\´ $ 2000 Market (world) price: $ 500 Illegal to import into Canada How much would you be willing to pay for this market to exist (assuming price would be $500)? Answer: (up to) $1,500 P DD QE Q SS PE Producer Surplus Consumer Surplus www.notesolution.comth Tuesday, October 20 , 2009. Consumer Demand Theory Measures benefit to buyers of participating in a market 1. #0807;,9L4357L.0 ZLOOL3J3088945, : Highest price you are willing to pay 2. Consumer surplus: Differencebetween actual price and reservation price 3. Rational consumer: Seeks to maximize consumer surplus Example: price of shirt, a baseball bat, or a sports ticket: $50 You have $50 to spend <4:770807;,9L4357L.0 ZLOOL3J3088945, Shirt: $200 Baseball bat: $100 Sports ticket: $25 What will you buy? Answer: shirt (consumer surplus: $200 - $50 = $150) Consumer Surplus Definition: Difference between the maximum a buyer would pay for a good and the price a buyer actually pays Example: Market Price $3 P Q Consumer Surplus 7 1 4 (7 3) 6 2 3 (6 3) 5 3 2 (5 3) 4 4 1 (4 3) 3 5 0 (3 3) 2 6 Not Relevant * Consumer Surplus equals area under demand curve and above the price www.notesolution.com
More Less
Unlock Document


Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit