surplus_measures_Presentation

# surplus_measures_Presentation - Surplus Measures 1 An...

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1 Surplus Measures

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2 An Alternative View of the Demand Curve An alternative interpretation of the demand curve is that it represents the consumer’s marginal willingness to pay or \$marginal benefit for the quantity specified. So, another way of looking at the demand curve is that it tells you the \$marginal benefit at each unit of consumption. \$Total benefit of consumption would then be the sum of all the marginal benefits up to, say, X units.
3 Willingness to Pay Think of the total amount you would pay for X units (say it is \$27) and then for X-1 units (say it is \$25). Your marginal willingness to pay for that Xth unit is \$2 (= 27 -25). Alternatively, we could say that your quantity demanded at the price \$2/unit is X because you are willing to pay up to \$2/unit for the Xth unit.

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4 Consumers Surplus For one individual: consumer’s surplus (CS) is the difference between the consumer’s total willingness to pay (\$total benefit) and what the consumer actually did pay (\$total expenditure). CS = the area between the consumer’s demand curve and the market price line. To go from individual consumer’s surplus to market consumers’ surplus, just use the market demand, which aggregates all the individuals.
5 Example: Li’s Willingness to Pay for Wheat and Consumer Surplus The table at the right shows Li’s willingness to pay for the indicated quantities of wheat. Her marginal marginal willingness to pay (marginal benefit) is the difference between her willingness to pay for X and X-1 units of wheat. Li’s demand curve would be the plot of her marginal willingness to pay against number of units. Marginal consumer surplus on each unit is the difference between marginal willingness to pay and the price she actually pays, P W =\$2/lb in this example.

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## This note was uploaded on 02/19/2009 for the course ECON 3010 taught by Professor Wissink during the Fall '07 term at Cornell.

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surplus_measures_Presentation - Surplus Measures 1 An...

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