Lecture #9 - Lecture #9 Consumer Surplus -Consumers welfare...

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Lecture #9 Consumer Surplus -Consumers’ welfare from consuming a particular quantity of a good can be measured as their total willingness to pay (TWTP) to consume it. -The height of the demand curve represents consumers’ marginal willingness to pay (MWTP) for the good, assuming they maximize utility. -The downward-sloping demand curve states the MWTP declines as quantity increases. -Starting at zero consumption of the good, sequentially increase the units consumed up to the actual quantity consumed, where MWTP (height of demand curve) is equal to price. -The MWTP of the first unit is high, the second unit a little less so, etc. -Adding together the MWTP for all units yields the TWTP (area under the demand curve) - TWTP exceeds expenditure on the good (price times quantity) by consumers’ surplus (CS) . -CS is the amount that consumers were willing to pay but didn’t have to. -A PRICE INCREASE REDUCES CONSUMERS’ SURPLUS Producers’ Surplus -The height of the supply curve at each output is the marginal cost of the producers. -This represents the price that competitive producers must receive in order to break even on producing the
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This note was uploaded on 03/25/2009 for the course ACE 451 taught by Professor Unnevehr during the Spring '08 term at University of Illinois, Urbana Champaign.

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Lecture #9 - Lecture #9 Consumer Surplus -Consumers welfare...

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