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lec04 - Consumers Demand Curve MONETARY MEASURES OF GAIN...

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1 MONETARY MEASURES OF GAIN AND LOSS 2 Consumer’s Demand Curve Market demand curve is the sum of individual demand curves. 3 Marginal Willingness to Pay = MWTP x = Amount of money that a person is willing to pay to obtain an extra unit of good X. Long Distance Calls MWTP 1 $8.00 2 6.00 3 4.50 4 3.00 5 2.00 6 1.50 4 Law of Diminishing MWTP MWTP x decreases as consumption of good X increases. 5 Graph MWTP: P Q 1 2 3 4 5 6 8.00 6.00 4.50 3.00 2.00 1.50 6 Graph MWTP: P Q 1 2 3 4 5 MWTP 8.00 6.00 4.50 3.00 2.00 1.50
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7 Graph MWTP: P Q 1 2 3 4 5 P MWTP = D 8.00 6.00 4.50 3.00 2.00 1.50 8 Demand Curve = MWTP curve Demand curve tells: At any price, how much will person buy. At any quantity, what is person’s MWTP. 9 Consumer obtains benefits in excess of amount paid. Suppose price = $1.50 Calls MWTP Price paid Surplus 1 8.00 1.50 6.50 2 6.00 1.50 4.50 3 4.50 1.50 3.00 4 3.00 1.50 1.50 5 2.00 1.50 0.50 6 1.50 1.50 0 16.00 14 Consumer surplus = Area under demand curve and above price P Q 1 2 3 4 5 6 MWTP = D 16 Original Consumer Surplus P Q p 1 17 Q P P 2 P 1 D New Consumer Surplus
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18 Q P P 2 P 1 D Change in Consumer Surplus 19 Example: Gas Tax D S 1.00 1.20
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