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Econ 281 Chapter5b - Ontheotherhand,...

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1    The individual’s demand curve can be seen as the individual’s  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
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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.
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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
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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
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5 Consumer Surplus Example 2 Craig’s 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
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6   In practice, a consumer’s demand curve is difficult to  estimate   Consumer Surplus can be estimated via changes  occurring in the optimal choice diagram (budget lines  and indifference curves)   Since utility is difficult to measure, consumer surplus  is measured through the amount of money needed  when a price change occurs:
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