Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Unformatted text preview: Surplus Measures An Alternative View of the Demand Curve An alternative interpretation of the demand curve is that it represents the consumers 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. 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 $2/unit for the Xth unit. Consumers Surplus For one individual: consumers surplus (CS) is the difference between the consumers total willingness to pay ($total benefit) and what the consumer actually did pay ($total expenditure). CS = the area between the consumers demand curve and the market price line. To go from individual consumers surplus to market consumers surplus, just use the market demand, which aggregates all the individuals. Example: Lis Willingness to Pay for Wheat and Consumer Surplus The table at the right shows Lis 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. Lis 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. Total consumer surplus is the sum of all entries in the marginal consumer surplus column....
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This note was uploaded on 02/01/2008 for the course ECON 3010 taught by Professor Wissink during the Fall '07 term at Cornell University (Engineering School).

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surplus_measures - Surplus Measures An Alternative View of...

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