Module 5 Notes

Module 5 Notes - LINK IT UP Example Calculate consumer...

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LINK IT UP Example: Calculate consumer surplus given linear supply and demand curves. In the sample market shown in the graph, equilibrium price is $10 and equilibrium quantity is 3 units. The consumer surplus area is highlighted above the equilibrium price line. This area can be calculated as the area of a triangle.
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Recall that to find the area of a triangle, you will need to know it’s base and height. Refer to the following example if you need a refresher. Let’s apply the calculation for the area of a triangle to our example market to see the added value that consumers will get for this item at the equilibrium price in our sample market. Setp 1 Define the base and height of the consumer surplus triangle. The base of the consumer surplus triangle is 3 units long. Be careful when you define the height of this triangle, it is tempting to say it is 25, can you see why it isn’t? The height is determined by the distance from the equilibrium price line and where the demand curve intersects the vertical axis. The height of the triangle begins at $10 and ends at $25, so it will be $25 – $10 =
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