consumer surplus

Consumer price index (CPI)

measures changes in the 'cost of living', the amount a consumer must spend to maintain a given standard of living

CPI Laspeyres/based weighted index can be calculated how

check goodnotes

Bias in CPI

fails to take into account:

-substitution

-improvements in quality/new goods

-distributional differences

substitution effect on a tax rebate policy

rebate only offsets income effect in normal goods

makes demand fall for inferior goods

what does income compensated demand curve plot

demand assuming income remains the same, captures only the substitution effect

what are the measures of consumer welfare and what are they for

methods to solve effect of price change on consumer welfare

1) C surplus:

2) Compensating variation:

3)Equivalent variation

what is consumer surplus

how much consumers value the good above its price

(partly reflects buying power so favours wealthier)

what is compensating variation

how much you would have to pay consumers to keep their utility the same after a price change

what is equivalent variation

what change in income would have the same effect on utility as a price change

how to calculate compensating variation

solve utility level at original price, find income level necessary for same utility at new prices.

draw new BL, shift until tangent with IC0, vertical shift between BL1 and new line is CV

how to calculate equivalent variation

solve utility level at new price and come, solve for level of income necessary with original prices to get same utility.

shift BL0 inward until tangent with IC1, vertical shift between BL0 and new line is EV