Module 6.2 Consumer Surplus Lecture
Demand and Supply Curves
Demand Curves: Indicate willingness to pay for marginal benefit.
Supply Curves: Indicate willingness to accept for marginal cost.
Market Equilibrium
Equilibrium: The price and quantity where there is no tendency to change; where marginal benefit equals marginal cost.
Surpluses and Shortages:
If price > equilibrium, there’s a surplus leading to price decrease.
If price < equilibrium, there’s a shortage leading to price increase.
Gains from Trade
When marginal benefit > marginal cost, there are gains from trade.
Example:
Willing to pay $4 for a taco, but only pays $3; the seller prefers receiving $3 over their cost of $2.
Consumer Surplus
Consumer surplus is the difference between willingness to pay and actual price paid.
Example of Consumer Surplus Calculation:
Highest willingness to pay is $7 for the first taco, with a price of $3:
Consumer Surplus: $7 (willingness) - $3 (price) = $4.
Second consumer willing to pay $6:
Consumer Surplus: $6 - $3 = $3.
A consumer willing to pay exactly $3 has zero consumer surplus.
Total Consumer Surplus Calculation
Shape: The area between demand curve and price level, typically a triangle.
Calculating Total Consumer Surplus:
Base: Total quantity sold (100 tacos).
Height: Difference between maximum willingness to pay ($7) and price ($3): $4.
Formula: Total Consumer Surplus = 1/2 * base * height
Total Consumer Surplus = 1/2 * 100 * 4 = $200.
Effect of Price on Consumer Surplus
Higher equilibrium price results in lower consumer surplus (smaller differences between willingness to pay and price).
Example: The diamond-water paradox:
First gallons of water valued highly; consumer surplus is large.
Marginal benefit decreases with each additional gallon.
Importance of Marginal Thinking
Understanding individual decisions based on marginal benefit and willingness to pay enhances personal satisfaction and economic efficiency.