KW_Macro_Ch_05_Sec_01_Consumer_Surplus_and_the_Demand_Curve

KW_Macro_Ch_05_Sec_01_Consumer_Surplus_and_the_Demand_Curve...

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>> Consumer and Producer Surplus Section 1: Consumer Surplus and the Demand Curve chapter 5 The market in used textbooks is not a big business in terms of dollars and cents. But it is a convenient starting point for developing the concepts of consumer and pro- ducer surplus. So let’s look at the market for used textbooks, starting with the buyers. The key point, as we’ll see in a minute, is that the demand curve is derived from their tastes or prefer- ences—and that those same preferences also determine how much they gain from the opportunity to buy used books. Willingness to Pay and the Demand Curve A used book is not as good as a new book—it will be battered and coffee-stained, may include someone else’s highlighting, and may not be completely up to date. How much this bothers you depends on your own preferences. Some potential buyers would prefer to buy the used book if it is only slightly cheaper than a new book, while
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2 CHAPTER 5 SECTION 1: CONSUMER SURPLUS AND THE DEMAND CURVE others would buy the used book only if it is considerably cheaper. Let’s define a poten- tial buyer’s willingness to pay as the maximum price at which he or she would buy a good, in this case a used textbook. An individual won’t buy the book if it costs more than this amount but is eager to do so if it costs less. If the price is just equal to an individual’s willingness to pay, he or she is indifferent between buying and not buying. The table in Figure 5-1 shows five potential buyers of a used book that costs $100 new, listed in order of their willingness to pay. At one extreme is Aleisha, who will buy a second-hand book even if the price is as high as $59. Brad is less willing to have a used book and will buy one only if the price is $45 or less. Claudia is willing to pay only $35, Darren only $25. And Edwina, who really doesn’t like the idea of a used book, will buy one only if it costs no more than $10. How many of these five students will actually buy a used book? It depends on the price. If the price of a used book is $55, only Aleisha buys one; if the price is $40, Aleisha and Brad both buy used books, and so on. So the information in the table on willingness to pay also defines the demand schedule for used textbooks. As we saw in Chapter 3, we can use this demand schedule to derive the market demand curve shown in Figure 5-1. Because we are considering only a small number of consumers, this curve doesn’t look like the smooth demand curves of earlier chap- ters, where markets contained hundreds or thousands of consumers. This demand curve is step-shaped, with alternating horizontal and vertical segments. Each hori- zontal segment—each step—corresponds to one potential buyer’s willingness to pay. However, we’ll see shortly that for the analysis of consumer surplus it doesn’t matter
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KW_Macro_Ch_05_Sec_01_Consumer_Surplus_and_the_Demand_Curve...

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