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### Class Notes - 10-1-07

Course: ECON 100, Fall 2007
School: Allegheny
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Word Count: 663

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- Microeconomics Class Notes 10/1/07 C. Consumer Surplus * Consumer Surplus = Marginal Benefit (WTP) Price 1. Individual Calculation (Price = \$3) Quantity 1 2 3 4 Marginal Benefit 10 (10-3) 7 5 2 Consumer Surplus 7 4 2 Would not purchase (X) Total Consumer surplus = \$13 We want marginal benefit We can calculate Marginal Benefit from WTP You don't want to calculate WTP from Marginal Benefit (it's just positive...

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- Microeconomics Class Notes 10/1/07 C. Consumer Surplus * Consumer Surplus = Marginal Benefit (WTP) Price 1. Individual Calculation (Price = \$3) Quantity 1 2 3 4 Marginal Benefit 10 (10-3) 7 5 2 Consumer Surplus 7 4 2 Would not purchase (X) Total Consumer surplus = \$13 We want marginal benefit We can calculate Marginal Benefit from WTP You don't want to calculate WTP from Marginal Benefit (it's just positive instead of negative like it would be if your calculating marginal benefit from WTP) Marginal benefit IS NOT willingness to pay Marginal benefit is what you're willing to pay for just that unit (the second unit purchased or the third unit purchased) Willingness to pay is what your're willing to pay for the total units (like 2 units) 2. Market Consumer Surplus from Demand Calculation (See graph in binder) a. Example: (See graph in binder) D P = 200 4Q S P = 20 + 2Q Q = 30 , P = \$80 - Area of a triangle: (1/2) * (base) * (height) o Consumer Surplus: (1/2) * (30) * (200-80) o Consumer Surplus: \$1800 - Consumer Surplus is important to know: o If the market is efficient o Analyze the efficiency and equity of governmental policies and tax implications (always measured in dollars) b. Example #2: Price Ceiling = \$70 (See Graph in Binder) II. Utility: a unitless measure of satisfaction The individual units is called utils (400 utils) = utility for something - Reveals preferences A. Preferences Tastes for some good Compare utility (indicator of preference) across all goods 1. Ranking a. Apples utility = 50 b. Bananas 100 c. Grapes 75 d. Pineapples 25 So bananas are preferred to grapes Grapes are preferred to apples Apples are preferred to pineapples If A > B and B > C, then A > C, so o Grapes are preferred to pineapples Example: pomegranates (utility = 25) o So, pineapples (utility = 25) ~ pomegranates (utility = 25) This means that the consumer is indifferent between these two goods B. MAIN Assumption OF CONSUMER THEORY (WE EXPECT THIS) - Goal of consumers is to maximize utility subject to the Budget Constraint o Budget Constraint Depends upon Income and prices Maximum income and prices. C. Utility Table (Red Versus Blue skittles [Blue is Y-Axis, Red is X-Axis] ) 4 220 270 310 360 (QUANTITY) 3 240 190 280 330 2 150 210 250 280 1 100 160 200 230 0 0 70 120 160 (QUANTITY) 0 1 2 3 (QUANTITY) This table is unique to a single individual. 370 350 300 260 190 4 1. Budget: Income = \$2 (Budget for skittles) a. Price(red) = \$1, Price(blue) = \$1 Affordable Bundles: (Within budget, maximizing Utility) Q(red) Q(BLUE) Utility 2 0 120 0 2 150 1 1 160 Optimal Bundle The bundle that maximizes utility within budget constraint The only purpose of money in this case is to determine which bundles we can afford given the price for each item/unit. Homework: HELP WITH CONSUMER SURPLUS Marginal Benefit is what we want in order to calculate consumer surplus * Consumer Surplus = (Marginal Benefit Price) * Marginal Benefit is the willingness to pay for JUST ONE UNIT (UNIQUE to that 1 unit) * Willingness to Pay would be for the TOTAL QUANTITY involved (EXAMPLE: 2 Weddings TOTAL) * In general, WTP will increase with quantity, - [but on the average will decrease as the unit quantity increases not necessary to know that] * Marginal Benefit is defined as the willingness of the consumer to pay for a single unique unit before going into the market (in the market, then the consumer realizes market price) * We calculate Marginal Benefit by: (The change in WTP) / (The change in Quantity) #3.) Quantity 0 1 2 3 4 WTP (Total Benefit for all units concerned) 0 9 15 20 23 Marginal Benefit (Benefit of the next unique unit) 0 9 6 5 3 (M.B < PRICE) CONSUMER WILL NOT PURCHASE Consumer Surplus (Marginal Benefit Price) 0 (9-4) = 5 (6-4) = 2 (5-4) = 1 X * It is always assumed that the table STARTS AT ZERO * So for the first quantity, The M.B is: (The change in WTP) / (The change in Quantity) [(9 0) / (1-0)] = 9 (M.B) - Price stays constant at\$4 The consumer surplus is then: (M.B Price) = (9-4) = 5. FOR WTP: If you add up the marginal benefit values between two quantities, you will get the actual WTP value for that TOTAL quantity. This is what she means by "just add the values together to calculate WTP from M.B. Example: Between Q=0 and Q=1, the WTP is: (0+9) Between Q=1 and Q=2, the WTP is: (0+9+6) = 15 for the value of Q=2 (2 TOTAL units) Between Q=2 and Q=3, the WTP is: (0+9+6+5) = 20 for the value of Q=3 (3 TOTAL units)
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