surplus_measures

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 consumer’s 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 $2/unit for the Xth unit. Consumers Surplus ◆ For one individual: consumer’s surplus (CS) is the difference between the consumer’s total willingness to pay ($total benefit) and what the consumer actually did pay ($total expenditure). ◆ CS = the area between the consumer’s demand curve and the market price line. ◆ To go from individual consumer’s surplus to market consumers’ surplus, just use the market demand, which aggregates all the individuals. Example: Li’s Willingness to Pay for Wheat and Consumer Surplus ◆ The table at the right shows Li’s 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. ◆ Li’s 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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surplus_measures - Surplus Measures An Alternative View of...

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