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Lecture 10

Lecture 10-Consumer Surplus


Department
Economics
Course Code
ECO101H1
Professor
Jack Carr
Lecture
10

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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
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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
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5
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3
Q
P
DD
1
7
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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)
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Shaded rectangle: consumer surplus ($4) on first unit purchased
3
1
6
Q
P
DD
2
7
5
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