ECN 104 Lecture Notes - Opportunity Cost, Market Failure, Externality
2 Jul 2018
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Chapter 7 - Consumers, Producers, and the Efficiency of Markets
●Welfare economics → the study of how the allocation of resources affects economic
well-being
Consumer Surplus
●Willingness to pay → maximum amount a buyer will pay for a good.
●Consumer surplus → the amount a buyer is willing to pay for a good minus the amount
the buyer actually pays for it.
● Measures the benefit to buyers participating in a market.
Ex. Consumer would’ve paid $100, bought it for $80, consumer surplus = $20
Demand Curve Measures Consumer Surplus
● The demand curve reflects buyers willingness to pay
→ can be used to measure consumer surplus
→ area below the demand curve and above the price measures consumer surplus in a market
→ total area is the sum of consumer surplus of all buyers in the market
●Marginal buyer → the buyer who would leave the market first if the price was any higher.
Lower Price Raises Consumer Surplus
● Buyers always want lower price for the goods they buy.
● Increase in consumer surplus consists of 2 parts
1. Additional consumer surplus to initial consumers - higher surplus at lower price.
2. Consumer surplus to new consumers - those willing to pay at the new price.
→ Total sum of consumer surplus increases.
What Consumer Surplus Measures
● Goal → to make normative judgements about the desirability of market outcomes
● Consumer surplus measures the benefit that buyers receive from a good as the buyer
themselves perceives it
→ consumer surplus is a good measure of economic well-being from in respect to buyers
● Not in the case of drug addicts → they are not looking after their best interests
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Chapter 7 - consumers, producers, and the efficiency of markets. Welfare economics the study of how the allocation of resources affects economic well-being. Willingness to pay maximum amount a buyer will pay for a good. Consumer surplus the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Measures the benefit to buyers participating in a market. Consumer would"ve paid , bought it for , consumer surplus = . The demand curve reflects buyers willingness to pay. Can be used to measure consumer surplus. Area below the demand curve and above the price measures consumer surplus in a market. Total area is the sum of consumer surplus of all buyers in the market. Marginal buyer the buyer who would leave the market first if the price was any higher. Buyers always want lower price for the goods they buy.
