Consumer Surplus

Consumer Surplus - Similarly, B earns $2 of consumer...

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5/4/10 9:10 PM Blackboard Learn Page 1 of 2 https://blackboard.usc.edu/webapps/portal/frameset.jsp?tab_tab_gro…oard%2Fexecute%2Flauncher%3Ftype%3DCourse%26id%3D_37604_1%26url%3D 4.a. Consumer Surplus. Consumer surplus is the buyer's profit from buying a good. Put another way, it is the excess of what a buyer would have been willing to pay for a good over what he actually had to pay for that good. Graphically, it is the area below the demand curve, above the price, and left of the quantity bought Example: You might be willing, if you had to, to pay $20 to make an important phone call. If the price you actually have to pay for that phone call is $1, then you earn a "profit" (consumer surplus) of $19 when you make the call. Figure 4.a.1 In figure 4.a.1, we suppose there are 4 consumers: A, B, C, and D. A is willing to pay $9 for one unit of the good. B will pay $8, C will pay $7, and D will pay $6. If the going market price of the good is $6 per unit, then A earns a "profit" (i.e., consumer surplus) of $3, since he was willing to pay $9 but only had to pay $6.
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Unformatted text preview: Similarly, B earns $2 of consumer surplus (CS), and C earns $1 of CS. Customer D, the so-called "marginal" consumer, is willing to pay $6 for a unit, but since the market price is $6, D gets no consumer surplus. In practice, consumer surplus is pictured as in figure 4.a.2, as the area below the demand curve, above the price, and left of the quantity bought. 5/4/10 9:10 PM Blackboard Learn Page 2 of 2 https://blackboard.usc.edu/webapps/portal/frameset.jsp?tab_tab_grooard%2Fexecute%2Flauncher%3Ftype%3DCourse%26id%3D_37604_1%26url%3D Figure 4.a.2 Figure 4.a.2 shows that when price is $7, consumer surplus is $30 (the yellow area). If the price falls to $4, existing consumers save $3 per unit on the 10 units they were already buying, for a gain of $30 (green) in consumer surplus. In addition, 4 more units are sold to buyers who wouldn't have wanted the good for $7, but who do want it for $4. These buyers gain $6 (blue) of consumer surplus when price falls from $7 to $4....
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This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.

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Consumer Surplus - Similarly, B earns $2 of consumer...

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