Consumer Surplus AP Micro 9/5/17

Warm Up How much are you willing to pay for a movie ticket? Now what if I told you it costs $10? Is your willingness to pay higher than the actual price?

Consumer Surplus Willingness to pay: the max price you would buy a good for Consumer Surplus: the benefits from being able to purchase a good In other words: the difference between how much you are willing/able to pay vs. how much you ACTUALLY paid Example: buying used textbooks

Consumer Surplus Suppose books are now $20: 1. Calculate total consumer surplus: The rule: As price falls, consumer surplus increases (the area under the curve and above the price increases)

Consumer Surplus 2. Suppose price increases to $40. Calculate the consumer surplus. The rule: As price rises, consumer surplus decreases.

Casey’s Willingness to Pay Josey’s Willingness to Pay Consider the market for cheese-stuffed jalapeno peppers. Use the table: a. Construct the demand schedules (each person’s) for peppers for prices of $0.00, $0.10, and so on, and b. Calculate the total consumer surplus when the price of a pepper is $0.40. Quantity of Peppers Casey’s Willingness to Pay Josey’s Willingness to Pay 1st pepper $0.90 $0.80 2nd pepper 0.70 0.60 3rd pepper 0.50 0.40 4th pepper 0.30

Casey’s consumer surplus = 0.50 + 0.30 + 0.10 Price of pepper Quantity demanded by Josey Quantity demanded by Casey Total quantity of peppers demanded $0.90 1 0.80 2 0.70 3 0.60 4 0.50 5 0.40 0.30 8 0.20 0.10 0.00 Casey’s consumer surplus = 0.50 + 0.30 + 0.10 Josey’s consumer surplus = 0.40 + 0.20 + 0 Total consumer surplus= $0.90 + $0.60 = $1.50

Consumer Surplus on a Demand Graph Consumer surplus is the area located above the equilibrium price and below the demand curve graph Since it creates a triangle, we can find the total consumer surplus by using the area of a triangle formula (A= 1/2 *b*h)

Graphing Consumer Surplus When looking at a graph that includes demand and supply, consumer surplus is still the area located above the equilibrium price and below demand.

Changing Prices and Consumer Surplus When a price is increased, consumer surplus falls. Ex) If the price of a text book goes from $20 to $30. This is because the area under the demand curve is decreased When a price is decreased, consumer surplus rises. This is because the area under the demand curve gets larger