Chapter 5: The Consumer & Supply
5-1. Consumer surplus definition:Consumer
surplus is defined as the difference between
what consumers are willing to pay for a unit
of the good and the amount consumers
actually do pay for the product. The market
demand curve shows the quantity of the
good that would be demanded by all
consumers at each and every price that
might exist. The demand curve tells us the
maximum price that consumers would be
willing to pay for any quantity supplied to
the market.
The consumer surplus is the area under the
demand curve and above a horizontal line at
the equilibrium price. If the demand curve
is a straight line, the consumer surplus is
the area of a triangle.
5-2. Consumer surplus uses: Consumer
Surplus is used to measure the welfare of a
group of consumers who purchase a
particular product at a particular price.
A graphic above explain consumer surplus
can be derived by considering the following
exercise: Suppose that only one unit of
good is available in a market, so, that first
unit could be sold at the price P1. In other
words there is a consumer in the market
who would be willing to pay P1,. Probably
that person either has a relatively high
desire or need for the product or the person
has a relatively high income. To sell two
units of that good the price would have to
be lowered to P2. (This assumes that the
firm cannot perfectly price distinguish and
charge two separate prices to two
customers.) A slightly lower price might
induce another customer to purchase the
product, or, might induce the first customer
to buy two units. Three units of the good
could be sold if the price is lowered to P3,
etc1.
The price that at last common in a free
market is that price which equalizes market
supply with market demand. That price will
be P in the diagram as long as the firms do
not price separate. Now go back to the first
1
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International Trade Theory and Policy - Chapter 90-6A:
Last Updated on 8/19/04
unit that could have been sold. The person
who would have been willing to pay P1 for
a unit of the good in the end pays only P for
the unit. The difference between the two
prices represents the amount of consumer
surplus that accrues to that person. For the
second unit of the good, someone would
have been willing to pay P2 but in the end
pays P. The second unit generates a smaller
amount of surplus than the first unit.
5-3. Estimates the change in surplus: The
rule of one-half estimates the change in
surplus for small changes in supply with a
constant demand curve.
where:
CS = Consumers' Surplus
Q0 and Q1 are the quantity demanded before
and after a change in supply
P0 and P1 are the prices before and after a
change in supply
Example:
Find the consumer surplus when Ahmed tend
to bay one kg of rice if the rice price 10 ID,
but when he went to market found that the
price of one kg is 8 ID?
Solution: