Econ301_week3

Econ301_week3 - Econ 301 Intermediate Microeconomics Week...

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Econ 301 Intermediate Microeconomics Week 3, Jun 28-Jul 2 Jingbo Cui (ISU) Econ 301-Summer 2010 Week 3, Jun 28-Jul 2 1 / 25 Outline 1 Consumer Welfare and Policy Analysis (Ch.5) Consumer Welfare Market Consumer Surplus Effects of Government Policies Labor Supply Curves Jingbo Cui (ISU) Econ 301-Summer 2010 Week 3, Jun 28-Jul 2 2 / 25
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Consumer Welfare and Policy Analysis (Ch.5) Consumer Welfare Welfare Economists use the word welfare to refer to the well-being of various groups such as consumers and producers. Economists call the analysis of the impact of a change on various groups well-being a study of welfare economics . Jingbo Cui (ISU) Econ 301-Summer 2010 Week 3, Jun 28-Jul 2 3 / 25 Consumer Welfare and Policy Analysis (Ch.5) Consumer Welfare Definitions Consumer welfare from a good - the benefit a consumer gets from consuming that good minus what the consumer paid to buy the good (i.e. measured in dollars). Where do we get the information regarding the benefit that consumers get from consumption? From the Demand curve. The demand curve reflects a consumer’s marginal willingness to pay. Marginal willingness to pay - the maximum amount a consumer is willing to spend for an extra unit (the marginal value that consumer places on on more unit of a good) Consumer Surplus - the monetary difference between what a consumer is willing to pay (WTP) for the quantity of the good purchased and what he pays to purchase the good. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 3, Jun 28-Jul 2 4 / 25
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Consumer Welfare and Policy Analysis (Ch.5) Consumer Welfare Graphical Interpretation An individual’s consumer surplus is the area under the demand curve and above the market price up to the quantity the consumer buys. Jingbo Cui (ISU) Econ 301-Summer 2010 Week 3, Jun 28-Jul 2 5 / 25 Consumer Welfare and Policy Analysis (Ch.5) Consumer Welfare Questions Suppose that you have the following demand curve with a step shape. Question - If the market price for magazines is $ 3, how many will you purchase? Answer - 3 magazines. Question - From the demand curve, what is your WTP for the first magazine? Answer $ 5. Question - What is your surplus from the first magazine purchase? Answer - You would have been willing to pay up to $ 5, and you only paid $ 3, so you received a surplus of $ 2. Question - What is your total surplus? Answer - $ 2 (for the 1st magazine) + $ 1 (for the 2nd magazine) Jingbo Cui (ISU) Econ 301-Summer 2010 Week 3, Jun 28-Jul 2 6 / 25
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Consumer Welfare and Policy Analysis (Ch.5) Consumer Welfare Consumer Surplus The monetary difference between what a consumer is willing to pay for the quantity of the good purchased and what the good actually costs is called consumer surplus (CS). Example, Figure 5.1
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Econ301_week3 - Econ 301 Intermediate Microeconomics Week...

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