Lecture Notes: Demand Curve and Consumer Surplus

Overview

Recap of demand fundamentals.
Introduction to new concepts:
- Two methods of reading the demand curve.
- How demand curves shift.
- Consumer surplus.

Definition: A function showing the quantity demanded at different prices.
- Quantity Demanded: The quantity buyers are willing and able to purchase at a specific price.
Illustration with Oil Market Example:
- At $55/barrel: Demand is 5 million barrels/day.
- At $20/barrel: Demand increases to 25 million barrels/day.
- At $5/barrel: Demand further rises to 50 million barrels/day.
Graphical Representation:
- Price on the vertical axis and quantity on the horizontal axis.
- Key characteristic: Downward sloping (lower price leads to higher quantity demanded).

Horizontal Method:
- Determines quantity demanded at a specific price.
- Example: At $55, 5 million barrels are demanded.
Vertical Method:
- Determines maximum price consumers are willing to pay for a specific quantity.
- Example: For the 5th million barrel, max willingness to pay is $55.

Definition: Consumer's gain from exchange; difference between maximum willingness to pay and the actual price.
Total Consumer Surplus:
- Sum of all individual consumer surpluses.
- Graphically represented by the area below the demand curve and above the market price.
Example Calculation:
- If the willingness to pay is $80 and the price is $20, consumer surplus for one unit is $60.
- Total Consumer Surplus for the market: Calculated using the area of a triangle formula.
  - Example: $(80-20) \times 90 / 2 = 2700$ (in millions, $2.7 billion$).