# Consumer surplus 6 5 4 3 2 1 21 21 consumer surplus

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Consumer Surplus 6 + 5 + 4 + 3 + 2 + 1 =21 21 Consumer Surplus - Example Rock Concert Tickets Price (\$ per ticket) 2 3 4 5 6 13 0 1 14 15 16 17 18 19 20 Market Price Will not buy more than 7 tickets because surplus from 8-th ticket is negative

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Consumer Surplus The step ladder demand curve can be converted into a straight-line demand curve by making the units of the good smaller Consumer surplus is the area under the demand curve and above the price
Demand Curve Consumer Surplus Consumer Surplus for the Market Demand Consumer Surplus Rock Concert Tickets Price (\$ per ticket) 2 3 4 5 6 13 0 1 Actual Expenditure 14 15 16 17 18 19 20 Market Price CS = ½ (\$20 - \$14)*(1600) = \$19,500

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Consumer Surplus in large market: Price \$ Quantity D 100 10 50 C onsumer Surplus Expenditure CS=(100-10)50/2=2250
Price Quantity D 4 3.5 3 2.5 2 1 2 3 4 Consumer Surplus when p=2: (3.5-2) + (3-2) + (2.5-2) = \$3. Example 1: Consumer Surplus from Coffee, p=2.

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Applying Consumer Surplus – An Example The Value of Clean Air Air is free in the sense that we don’t pay to breathe it Question: Are the benefits of cleaning up the air worth the costs?
The Value of Clean Air No market exists for clean air, but it is possible to deduce from empirical data whether people are willing to pay for it Example: People pay more to buy houses where the air is clean Using the empirical estimates, we can measure people’s consumer surplus for pollution reduction from the demand curve

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The shaded area represents the consumer surplus generated when air pollution is reduced by 5 parts per 100 million of nitrous oxide at a cost of \$1000 per part reduced. Valuing Cleaner Air 2000 10 0 1000 5 A NOX (pphm) Pollution Reduction Value
Value of Cleaner Air A full cost-benefit analysis would include total benefit of cleanup Total benefits would be compared to total costs to determine if the clean up was worthwhile

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Individual Demand and Income Changes The impact of a change in the income can also be illustrated using indifference curves Changing income, with prices fixed, causes consumers to change their choice
Effects of Income Changes Food (units per month)

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