ECN 104 Chapter Notes - Chapter 7: Economic Surplus, Demand Curve, Marginal Utility

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23 Jul 2016
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Chapter 7- Consumers, Producers, and the Efficiency of
Markets
Consumer Surplus
Willingness to Pay
Willingness to Pay: The maximum amount that a buyer will pay for a good
WTP= Value
WTP= Benefit
Consumer Surplus: A buyers willingness to pay minus the amount the buyer actually
pays
-Consumer surplus is closely related to the demand curve for a product
Using the Demand Curve to Measure Consumer Surplus
-Because the demand curve reflects buyers willingness to pay, it can also be used to
measure consumer surplus
-The area below the demand curve and above the price measures the consumer
surplus in a market
-The difference between this willingness to pay and the market price is each buyers
consumer surplus
-The total area below the demand curve and above the price is the sum of the
consumer surplus of all buyers in the market for a good or service
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How a Lower Price Raises Consumer Surplus
-Because buyers always want to pay less for the goods they buy, a lower price makes
buyers of a good better off
But how much does buyers well-being rise in response to a lower price? Use concept of
consumer surplus to answer that question precisely
What Does Consumer Surplus Measure?
-Consumer surplus measures the benefit that buyers receive from a good as the buyers
themselves perceive it
-Consumer surplus is a good measure of economic well-being (if policymakers want to
respect the presences of buyers)
-In some circumstances, policy makers choose not to care about consumer surplus
because they do not respect the preferences that drive buyer behaviour
-Drug Addicts
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