Demand, Marginal Benefit, and Consumer Surplus

• The demand curve reflects your willingness to pay - the maximum price that a person is willing to pay for a good

• A demand curve is a marginal benefit curve – the area under the D curve represents the total benefits from consumption

P Qd

10 1

9 2

8 3

7 4

6 5

5 6

4 7

Demand & Consumer Surplus

P

Q

6

5

D

10

Demand reflects the maximum price consumers are willing to pay

• How much value (benefit) does the consumer receive?

• Notice that total benefits are more than what you pay

P

Q

6

5

D

10

Demand & Consumer Surplus

P Qd $ Paid Con Surplus

10 1 6 4

9 2 6 3

8 3 6 2

7 4 6 1

6 5 6 0

Total 30 + 10

Demand & Consumer Surplus

Consumer Surplus

• Consumer surplus is equal to the difference between the buyer’s willingness to pay and the actual price paid

• Consumer surplus measures the net benefits from consumption

• If consumer surplus increases, then consumers are better off

Consumer Surplus

P

Q

6

5

D

Amount paid ($30)

Consumer surplus is the area below the demand curve and above the market price ($10)

How a change in Price affects consumer surplus

Quantity

Price

0

Demand

P1

A

B

Initialconsumersurplus

C

Q1 Q2

Supply

How a change in Price affects consumer surplus

Quantity

Price

0

Demand

P1

P2

A

B

D

C

E

Q1 Q2

Initialconsumersurplus

Supply

S

Consumer surplus to new consumers

Additional consumer surplus to initial consumers

Practical Utility of Consumer’s surplus

• Public Finance- Where the consumers are enjoying a surplus, there is a scope for taxation.

• Monopoly value- A monopolist will find that he can easily raise price of his product if the commodity is yielding surplus of satisfaction to the consumer.