Principles of Economics- Mankiw (5th) 141

Principles of Economics- Mankiw (5th) 141 - CHAPTER 7...

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CHAPTER 7 CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 147 Now suppose that the price falls from P 1 to P 2 , as shown in panel (b). The con- sumer surplus now equals area ADF. The increase in consumer surplus attribut- able to the lower price is the area BCFD. This increase in consumer surplus is composed of two parts. First, those buy- ers who were already buying Q 1 of the good at the higher price P 1 are better off be- cause they now pay less. The increase in consumer surplus of existing buyers is the reduction in the amount they pay; it equals the area of the rectangle BCED. Sec- ond, some new buyers enter the market because they are now willing to buy the good at the lower price. As a result, the quantity demanded in the market increases from Q 1 to Q 2 . The consumer surplus these newcomers receive is the area of the tri- angle CEF. WHAT DOES CONSUMER SURPLUS MEASURE? Our goal in developing the concept of consumer surplus is to make normative judgments about the desirability of market outcomes. Now that you have seen
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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