Lecture on Demand and Supply Curves, Equilibrium, and Consumer Surplus

Key Concepts

• Demand Curves
  • Represent willingness to pay or marginal benefit.
• Supply Curves
  • Represent willingness to accept or marginal cost.
• Equilibrium
  • The price and quantity where there is no tendency to change.
  • Occurs where marginal benefit equals marginal cost.

Understanding Market Equilibrium

• Taco Market Example
  • Equilibrium price and quantity simplified as 3.
  • Higher price leads to surplus: more tacos for sale than demand -> prices fall.
  • Lower price leads to shortage: more demand than tacos available -> prices rise.

Gains from Trade

• Example: Willingness to pay $4, sell for $2, transaction at $3.
  • Both parties better off: consumer pays less than what they're willing, seller receives more than cost.

Consumer Surplus

• Defined
  • Difference between willingness to pay and price paid.
• Example Calculations
  • First consumer: willing to pay $7, pays $3 -> Consumer Surplus: $4.
  • Another consumer: willing to pay $6, pays $3 -> Consumer Surplus: $3.
  • Consumer willing to pay $3 has zero surplus.
• No Sale Scenario
  • Willingness to pay $2.50, price is $3 -> no purchase.

Quantifying Consumer Surplus

• Calculation Method
  • Area between demand curve and price.
  • Formula for area of triangle: (\frac{1}{2} \times \text{base} \times \text{height}).
  • Base: Total quantity sold (e.g., 100 tacos).
  • Height: Difference between max willingness to pay ($7) and price ($3) equals 4.
  • Example: (\frac{1}{2} \times 100 \times 4 = 200) of consumer surplus.
• Impact of Price Changes
  • Higher equilibrium price decreases consumer surplus.

Additional Insights

• Price vs. Value
  • Value is determined by willingness to pay, not price.
• Diamond-Water Paradox
  • Example of extreme willingness to pay for necessity (water) despite low price.

Application to Daily Decisions

• Understanding marginal thinking, willingness to pay, and consumer surplus enhances personal decision-making.