1. Lectures in Microeconomics-Charles W. Upton Consumer Surplus and Indifference Curves

2. Consumer Surplus We have defined Consumer Surplus in terms of demand curves. Can we provide a formal definition in terms of utility functions? P D Q

3. Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo Budget

4. Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo

5. Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo

6. Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo X1X1

7. Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo X1X1 Consumer Surplus = X 1 - X o

8. Consumer Surplus and Indifference Curves The Equation A consumer has income of x o

9. Consumer Surplus and Indifference Curves The Equation A consumer has income of x o He gets the chance to purchase at a price p o He purchases q o

10. Consumer Surplus and Indifference Curves The Equation A consumer has income of x o He gets the chance to purchase at a price p o He purchases q o Let his utility function be U(X, q)  defines consumer surplus U(x o -p o q o, q o ) = U(x o + , 0)

11. Consumer Surplus and Indifference Curves The Equation U(x o -p o q o, q o ) = U(x o + , 0) Units of good purchased

12. Consumer Surplus and Indifference Curves The Equation U(x o -p o q o, q o ) = U(x o + , 0) Units of good purchased Amount to spend on other goods.

13. Consumer Surplus and Indifference Curves The Equation U(x o -p o q o, q o ) = U(x o + , 0) Units of good purchased Amount to spend on other goods. Dollars that would represent an equal increase in utility.

14. Consumer Surplus and Indifference Curves One of a Kind A consumer has income of x o He gets the chance to buy a one of a kind item for p o His Utility Function is U(x,N)

15. Consumer Surplus and Indifference Curves One of a Kind A consumer has income of x o He gets the chance to buy a one of a kind item for p o His Utility Function is U(x,N) X = Dollars spend on everything but the item

16. Consumer Surplus and Indifference Curves One of a Kind A consumer has income of x o He gets the chance to buy a one of a kind item for p o His Utility Function is U(x,N) X = Dollars spend on everything but the item N= 0 (doesn’t buy) N=1 (buys)

17. Consumer Surplus and Indifference Curves An Application A consumer has income of x o He gets the chance to buy a one of a kind item Let U(x o -p o, 1) = U(x o + , 0)  defines consumer surplus

18. Consumer Surplus and Indifference Curves Willingness to Pay A consumer has income of x o He gets the chance to a buy a one of a kind item

19. Consumer Surplus and Indifference Curves Willingness to Pay A consumer has income of x o He gets the chance to a buy a one of a kind item Let U(x o - , 1) = U(x o, 0)  defines the maximum amount he is willing to pay

20. Consumer Surplus and Indifference Curves A Comparison Consumer Surplus U(x o -p o, 1) = U(x o + , 0)

21. Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0)

22. Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0)  + p o  

23. Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0)  + p o  

24. Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0) Suppose I am given a rare beautiful painting.

25. Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0) Significant consumer surplus.

26. Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0) But would I be willing to pay that much?

27. Consumer Surplus and Indifference Curves End ©2003 Charles W. Upton