Chapter4 - Part 2 - Individual and Market Demand Chapter 4...

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Individual and Market Demand Chapter 4
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Chapter Outline Individual Demand Income and Substitution Effects Market Demand Consumer Surplus
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Willingness to Pay (WTP) A buyer’s willingnes s 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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Willingness to Pay (WTP) Derive the demand schedule: 4 J ohn, Chad, Anthony, Flea 0 – 125 3 Chad, Anthony, Flea 126 – 175 2 Anthony, Flea 176 – 250 1 Flea 251 – 300 0 nobody $301 & up Q d who buys P (price of iPod) name WTP Anthony $250 Chad 175 Flea 300 John 125
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Willingness to Pay (WTP) P Q d $301 & up 0 251 – 300 1 176 – 250 2 126 – 175 3 0 – 125 4 P Q
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Willingness to Pay (WTP) P Q 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. Flea’s WTP Anthony’s WTP Chad’s WTP J ohn’s WTP
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Consumer Surplus Cons umer s urplus is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP P
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Consumer Surplus and the Demand Curve P Q Flea’s WTP P = $260 Flea’s CS = $300 – 260 = $40 Total CS = $40
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