CONSUMER SURPLUS
An important problem in applied welfare economics
is to devise a monetary measure of the
gains and losses that individuals experience when
prices change. One use for such a measure is
Welfare Changes and the Marshallian Demand
Curve
So far our analysis of the welfare effects of price
changes has focused on the compensated demand
curve. This is in some ways unfortunate because most
REVEALED PREFERENCE AND THE
SUBSTITUTION EFFECT
The principal unambiguous prediction that can be
derived from the utility-maximation model is that the
slope (or price elasticity) of the compensated de
Engel Aggregation
We discussed the empirical analysis of market shares
and took special note of Engels law that the share of
income devoted to food declines as income increases.
From an elasticity per
Relationships among demand Elasticities
There are a number of relationships among the
elasticity concepts that have been developed
in this section. All of these are derived from the
underlying model o
DEMAND ELASTICITIES
So far we have been examining how individuals
respond to changes in prices and income by looking
at the derivatives of the demand function. For many
analytical questions this is a
A MATHEMATICAL DEVELOPMENT OF
RESPONSE TO PRICE CHANGES
Up to this point we have largely relied on graphical
devices to describe how individuals respond to price
changes. Additional insights are provi
Indirect approach
To begin our indirect approach,4 we will assume (as
before) there are only two goods
(x and y) and focus on the compensated demand
function, xc.px , py ,U., introduced in
Equation 5.
The Substitution Effect
Consequently, the derivative we seek has two terms.
Interpretation of the first term is straightforward: It is
the slope of the compensated demand curve. But that
slope represe
The Consumer Surplus Concept
There is another way to look at this issue. We can ask
how much this person would be willing to pay for the
right to consume all of this good that he or she
wanted at the