Econ 281 Chapter5b - 1 The individuals demand curve can be...

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Unformatted text preview: 1 The individuals demand curve can be seen as the individuals willingness to pay curve. On the other hand, the individual must only actually pay the market price for (all) the units consumed. For example, you may be willing to pay $40 for a haircut, but upon arriving at the stylist, discover that the price is only $20 The difference between willingness to pay and the amount you pay is the Consumer Surplus 2 Definition: The net economic benefit to the consumer due to a purchase (i.e. the willingness to pay of the consumer net of the actual expenditure on the good) is called consumer surplus . The area under an ordinary demand curve and above the market price provides a measure of consumer surplus. Note that a consumer will receive more surplus from the first good than from the last good. 3 Consumer Surplus D Q * P * Equilibrium Or market Price Quantity Price Consumer Surplus Consumer Surplus: The difference between what a consumer is willing to pay and what they pay for each item 4 Efficiency of the Equilibrium Quantity D 10 $8 This calculation Only works for A linear demand curve Quantity Price Consumer Surplus Consumer Surplus = area of triangle =1/2bh =1/2(16-8)(10) =40 $16 5 Consumer Surplus Example 2 Craigs demand for model cars is given by the demand curve P=20-Q. If model cars cost $10 each, how much consumer surplus does Craig have? P=20-Q 10=20-Q 10=Q, Craig buys 10 model cars Consumer Surplus =1/2bh =1/2(10)(20-10) =50 6 In practice, a consumers demand curve is difficult to estimate Consumer Surplus can be estimated via changes occurring in the optimal choice diagram (budget lines and indifference curves)...
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This note was uploaded on 03/14/2009 for the course ECON ECON 281 taught by Professor Priemaza during the Fall '08 term at University of Alberta.

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Econ 281 Chapter5b - 1 The individuals demand curve can be...

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