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Chapter 4

ECON 101 Chapter 4: 04 Surplus

8 pages69 viewsFall 2018

Department
Economics
Course Code
ECON 101
Professor
Mitchell Dudley
Chapter
4

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Chapter 4: Consumer and Producer Surplus
Consumer Surplus and the Demand Curve
Willingness to pay: the maximum price at which he or she would buy that good
Marginal benefit
Individual consumer surplus: net gain to an individual buyer from the purchase of a
good
Expect to get quality/value at the willingness to pay price
Consumer surplus is getting something valued at a higher price, but bought at a
lower price
CS = Willing to pay - what we actually pay
The demand curve for used
textbooks
Different personal value of the textbook,
e.g. Aleisha thinks will get more out of a
textbook than Edwina = different
willingnesses to pay
Each time we get to another
threshold/price consumer is willing to
pay, we add another point
Steps out demand curve (steps
because can only buy 1 textbook
at a time)
Willingness to pay → demand curve (marginal benefit)
If the price drops, benefit does not change (Aleisha = $59 value), but net benefit
changes (consumer surplus = $29 if price of textbook is $30)
Consumer surplus in the market for used
texts
If price is set at $30 in the market:
Darren/Edwina does not buy (no
consumer surplus)
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Aleisha, Brad, Claudia buy the book (total CS = $49)
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Consumer Surplus
Calculating CS:
½*(2500 - 500)*1 mil = $1 bil ------------->
Calculate area of triangle
Consumer surplus: the area between demand
and price paid from a quantity of zero to the
quantity exchanged in the market
Change in consumer surplus = change in
wellbeing of consumers, change in income,
change in personal value
Change in price for used texts
($30 → $20)
Dropping price increases
consumer surplus for those who
were willing to pay higher
Darren is now willing to buy, gets
CS of $5
Total Consumer Surplus
increases
A Fall in the Market Price
As price drops, sees expansion in
consumer surplus (overall green
trapezoid)
Increase in consumer surplus in original
units + consumer surplus gained by new
units purchased
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