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

This preview shows 15 out of 26 pages.

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
Image of page 15

Subscribe to view the full document.

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
Image of page 16
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
Image of page 17

Subscribe to view the full document.

Consumer Surplus in large market: Price $ Quantity D 100 10 50 C onsumer Surplus Expenditure CS=(100-10)50/2=2250
Image of page 18
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.
Image of page 19

Subscribe to view the full document.

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?
Image of page 20
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
Image of page 21

Subscribe to view the full document.

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
Image of page 22
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
Image of page 23

Subscribe to view the full document.

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
Image of page 24
Effects of Income Changes Food (units per month)
Image of page 25

Subscribe to view the full document.

Image of page 26
You've reached the end of this preview.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern