Ch 7 outline - Chapter 7 outline: I. Definition of welfare...

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Chapter 7 outline: I. Definition of  welfare economics : the study of how the allocation of resources affects  economic well-being. II. Consumer Surplus A. Willingness to Pay 1. Definition of  willingness to pay : the maximum amount that a buyer  will pay for a good. 3. Definition of  consumer surplus : a buyer’s willingness to pay minus  the amount the buyer actually pays. B. Using the Demand Curve to Measure Consumer Surplus 1. We can use the information on willingness to pay to derive a demand  curve for the rare Elvis Presley album. Price Buyers Quantity Demanded More than $100 None 0 $80 to $100 John 1 $70 to $80 John, Paul 2 $50 to $70 John, Paul, George 3 $50 or less John, Paul, George, Ringo 4
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2. At any given quantity, the price given by the demand curve reflects the  willingness to pay of the  marginal buyer .  Because the demand curve  shows the buyers’ willingness to pay, we can use the demand curve to  measure consumer surplus. 3. Consumer surplus can be measured as the area below the demand  curve and above the price. C. How a Lower Price Raises Consumer Surplus 1. As price falls, consumer surplus increases for two reasons. a. Those already buying the product will receive additional  consumer surplus because they are paying less for the product  than before (area A on the graph).
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This note was uploaded on 08/31/2009 for the course EC 350 taught by Professor Sekelj during the Spring '08 term at Clarkson University .

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Ch 7 outline - Chapter 7 outline: I. Definition of welfare...

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