topic3_consumer behaviorII

# 37 5 consumer surplus studying welfare with demand

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Unformatted text preview: stitute toward the relatively inexpensive good when prices change inexpensive good when prices change disproportionately. 37 5. Consumer Surplus Studying Welfare with Demand Curve • Demand curve • It shows the level of demand when price is given. shows the level of demand when price is given • Another way of interpreting it: it shows the willingness to pay (or valuation) of consumers when quantity is given. – Inverse demand • We can measure consumers’ welfare from demand curve in the second interpretation. curve in the second interpretation. 38 Studying Welfare Effects with Demand Curves • We can show this diagrammatically: Price = total value from X1 units total value from total compensated consumer surplus compensated consumer surplus P • The total value of The total value of consuming X1 units of X is the area under the demand the area under the demand curve • marginal value of ith unit of x X1 • The marginal value of the ith unit of X is the vertical distance between distance between X1 and the demand curve. D Quantity Now if we subtract the if we subtract the price we pay for each unit from this schedule we are left with the consumer surplus 39 Studying Welfare Effects with Demand Curves • Price P = loss of surplus from price increase loss of surplus from price increase We can also measure the change of welfare with price change change. P1 P0 D X2 X1 Quanity 40...
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