1. Lectures in Microeconomics-Charles W. Upton Consumer Surplus

2. The Basic Concept A consumer gets benefit from each unit purchased. However each unit brings less benefit 1 2 3 4 5 6 7 8 9 10 11 12 $60 $40

3. Consumer Surplus The Basic Concept A consumer gets benefit from each unit purchased. However each unit brings less benefit A consumer purchases until marginal benefit equals price 1 2 3 4 5 6 7 8 9 10 11 12

4. Consumer Surplus The Basic Concept A consumer purchases until marginal benefit equals price If the price rose to $20, the consumer would demand fewer units. 1 2 3 4 5 6 7 8 9 10 11 12

5. Consumer Surplus The Basic Concept Effectively we have a demand curve. 1 2 3 4 5 6 7 8 9 10 11 12

6. Consumer Surplus The Basic Concept Effectively we have a demand curve. 1 2 3 4 5 6 7 8 9 10 11 12

7. Consumer Surplus The Basic Concept How do we compute the total benefit or consumer surplus the consumer gets from his purchases? 1 2 3 4 5 6 7 8 9 10 11 12

8. Consumer Surplus The Basic Concept We could sum up the benefits from each unit purchased. CS = 50 + 45+… 1 2 3 4 5 6 7 8 9 10 11 12

9. Consumer Surplus The Basic Concept We could sum up the benefits from each unit purchased. We could simply find the area under the demand curve 1 2 3 4 5 6 7 8 9 10 11 12

10. Consumer Surplus Computing Consumer Surplus This is the standard way of computing consumer surplus. QoQo

11. Consumer Surplus Computing Consumer Surplus This is the standard way of computing consumer surplus Look at the demand function. A consumer purchases Q o units, to the point where MB = Price QoQo

12. Consumer Surplus Computing Consumer Surplus This is the standard way of computing consumer surplus Look at the demand function. A consumer purchases Q o units, to the point where MB = Price Consumer surplus is then the shaded area QoQo

13. Consumer Surplus Computing Consumer Surplus This computation is easy. Remember the basic formula for the area of a right triangle: QoQo

14. Consumer Surplus Computing Consumer Surplus This computation is easy. Remember the basic formula for the area of a right triangle: QoQo

15. Consumer Surplus Computing Consumer Surplus This computation is easy. Remember the basic formula for the area of a right triangle: QoQo

16. Consumer Surplus A Numerical Example Q = 100 – 2p 80 50 10

17. Consumer Surplus A Numerical Example Q = 100 – 2p When P = 10 Q = 80 80 50 10

18. Consumer Surplus A Numerical Example Q = 100 – 2p When P = 10 Q = 80 Base = 80 80 50 10

19. Consumer Surplus A Numerical Example Q = 100 – 2p When P = 10 Q = 80 Height = 40 80 50 10

20. Consumer Surplus A Numerical Example Q = 100 – 2p When P = 10 Q = 80 Base =80 Height = 40 80 50 10

21. Consumer Surplus An Application The Demand for a particular product is shown on the graph. P D Q

22. Consumer Surplus An Application The Demand for a particular product is shown on the graph. The good sells for p P D Q

23. Consumer Surplus An Application The Demand for a particular product is shown on the graph. The good sells for p Compute consumer surplus P D Q

24. Consumer Surplus An Application The Demand for a particular product is shown on the graph. The good sells for p Compute consumer surplus P D Q

25. Consumer Surplus No Right Triangle? P D Q

26. Consumer Surplus No Right Triangle? P D Q

27. Consumer Surplus No Intersection P D Q

28. Consumer Surplus No Intersection P D Q Is there such a demand curve? And, if there is, mathematicians can sometimes find the area. We won’t worry about these special cases.

29. Consumer Surplus An Application The Demand for a particular product is shown on the graph. The good sells for p Compute consumer surplus P D Q Computing consumer surplus is simple. It is a powerful concept, with major applications.

30. Consumer Surplus End ©2003 Charles W. Upton