CH5_Consumer_Welfare - Intermediate Microeconomics Consumer...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Intermediate Microeconomics Consumer Welfare Instructor: Bin Xie Spring 2015
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Consumer Welfare I How much are consumers helped or harmed by shocks that affect the equilibrium price and quantity? I Shocks may come from new inventions that reduce firm costs, natural disasters, or government-imposed taxes, subsidies, or quotas. I You might think utility is a natural measure of consumer welfare. I Utility is problematic because utility doesn’t allow for easy comparisons across consumers (ordinal measure). I A better measure of consumer welfare is in terms of money - more universal.
Image of page 2
Consumer Surplus Consumer Surplus is the monetary difference between the maximum amount that a consumer is willing to pay for the quantity purchased and what the good actually costs. I Graphically, consumer surplus is the area under the inverse demand curve and above the market price up to the quantity purchased by the consumer.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Effect of a Price Change on Consumer Surplus I If the price of a good rises, consumers of that good lose consumer surplus. I It is the amount of income we would have to give the consumer to offset the harm of an increase in price.
Image of page 4
Expenditure Function I Another measure of the harm to a consumer of a price increase is an increase in the consumer’s income/expenditure needed to maintain the consumer’s utility. I Recall how we measure the minimal expenditure necessary to achieve a specific utility level and given a set of prices - expenditure function: E = E ( p 1 , p 2 , ¯ U ) I Welfare change associated with price increase to p * 1 is the change of the minimum expenditure: Δ E = E ( p 1 , p 2 , ¯ U ) - E ( p * 1 , p 2 , ¯ U )
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Expenditure Function (Cont.) I Which level of utility should be used in this calculation? Δ E = E ( p 1 , p 2 , ¯ U ) - E ( p * 1 , p 2 , ¯ U ) I Two options: Compensating Variation (CV) is the amount of money we would have to give a consumer after a price increase to keep the consumer on their original indifference curve.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern