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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 Spring '13
 PaulRuud
 Microeconomics, Econometrics, Consumer price index, Engel Curve, Hicksian demand curves

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