Lecture 6- CS and PS, CH 7-BB

# Lecture 6- CS and PS, CH 7-BB - WillingnesstoPay(WTP A...

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Willingness to Pay (WTP) A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good. WTP measures how much the buyer values the good. name WTP Anthony \$250 Chad 175 Flea 300 John 125 Example: 4 buyers’ WTP for an iPod

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WTP and the Demand Curve Q: If price of iPod is \$200, who will buy an iPod, and what is quantity demanded? A: Anthony & Flea will buy an iPod, Chad & John will not. Hence, Q d = 2 when P = \$200. name WTP Anthony \$250 Chad 175 Flea 300 John 125
WTP and the Demand Curve Derive the demand schedule: 4 John, Chad, Anthony, Flea 0 – 125 3 Chad, Anthony, Flea 126 – 175 2 Anthony, Flea 176 – 250 1 Flea 251 – 300 0 nobody Q d who buys P (price of iPod) name WTP Anthony \$250 Chad 175 Flea 300 John 125

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\$0 \$50 \$100 \$150 \$200 \$250 \$300 \$350 0 1 2 3 4 WTP and the Demand Curve P Q d \$301 & up 0 251 – 300 1 176 – 250 2 126 – 175 3 0 – 125 4 P Q
\$0 \$50 \$100 \$150 \$200 \$250 \$300 \$350 0 1 2 3 4 About the Staircase Shape… This D curve looks like a staircase with 4 steps – one per buyer. P Q If there were a huge # of buyers, as in a competitive market, there would be a huge # of very tiny steps, and it would look more like a smooth curve.

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\$0 \$50 \$100 \$150 \$200 \$250 \$300 \$350 0 1 2 3 4 WTP and the Demand Curve At any Q , the height of the D curve is the WTP of the marginal buyer , the buyer who would leave the market if P were any higher. P Q Flea’s WTP Anthony’s WTP Chad’s WTP John’s WTP
Consumer Surplus (CS) Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP P name WTP Anthony \$250 Chad 175 Flea 300 John 125 Suppose P = \$260. Flea’s CS = \$300 – 260 = \$40. The others get no CS because they do not buy an iPod at this price. Total CS = \$40.

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\$0 \$50 \$100 \$150 \$200 \$250 \$300 \$350 0 1 2 3 4 CS and the Demand Curve P Q Flea’s WTP P = \$260 Flea’s CS = \$300 – 260 = \$40 Total CS = \$40
\$0 \$50 \$100 \$150 \$200 \$250 \$300 \$350 0 1 2 3 4 CS and the Demand Curve P Q Flea’s WTP Anthony’s WTP Instead, suppose P = \$220 Flea’s CS = \$300 – 220 = \$80 Anthony’s CS = \$250 – 220 = \$30 Total CS = \$110

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\$0 \$50 \$100 \$150 \$200 \$250 \$300 \$350 0 1 2 3 4 CS and the Demand Curve P Q The lesson: Total CS equals the area under the demand curve above the price, from 0 to Q .
0 10 20 30 40 50 60 0 5 10 15 20 25 30 P Q \$

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## This note was uploaded on 12/02/2011 for the course ECON 200 taught by Professor Vincent during the Fall '08 term at Maryland.

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Lecture 6- CS and PS, CH 7-BB - WillingnesstoPay(WTP A...

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