Understanding Consumer Surplus

Definition

• Consumer Surplus (CS): Measure of consumer benefits; used by economists to compare market scenarios and evaluate effects of market interventions.

Components

• Willingness to Pay (WTP): Maximum price a consumer is willing to pay for a good.
• Actual Price Paid: The price the consumer actually pays for the good.
• Consumer Surplus Calculation: CS = WTP - Actual Price Paid.

Example: Single Unit

• Buying an Apple:
  • WTP: $2
  • Actual Price Paid: $1
  • CS: $2 - $1 = $1
  • Interpretation: $2 worth of benefit from the apple but paid $1.

Example: Multiple Units

• Buying 3 bottles of water, each for $3:

  | Unit | WTP | Price | WTP-Price (CS) | |------|-----|-------|----------------| | 1st | $6 | $3 | $3 | | 2nd | $5 | $3 | $2 | | 3rd | $4 | $3 | $1 |
  • Total CS: $3 + $2 + $1 = $6.

Example: Demand Curve

• Price: $20
• Quantity Demanded: 10
• Demand Curve: Represents highest WTP for each quantity.
• Example Unit (5th unit):
  • WTP (5th unit): $25
  • Actual Price Paid: $20
  • CS for 5th unit: $25 - $20 = $5

Calculating Consumer Surplus from Demand Curve

• General Case: Area between demand curve and price line up to quantity consumed (Q = 10)
• Calculation Method: Area of triangle = ½ × base × height
• Example:
  • Base: 10
  • Height: 10
  • CS: ½ × 10 × 10 = 50

Conclusion

• Summary of CS: Area below demand, above price over quantities consumed.
• Calculation becomes straightforward with demand curves.

Additional Info

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