6.3 Consumer Surplus Flashcards
What is consumer surplus?
Consumer surplus
The difference between the total value that consumers place on all units consumed of a product and the payment that they actually make to purchase that amount of the product.
It is like a “profit” for consumers because they can purchase a product for less than the maximum amount they are prepared to pay.
What is consumer surplus the difference between?
Consumer surplus on each unit consumed is the difference between the market price and the maximum price that the consumer is willing to pay to obtain that unit.
What do we call the sum of the values for all of the units
The sum of the values that she places on each litre of milk gives us the total value that she places on all 10 litres.
Where do we derive the “profit” in consumer surplus.
Because Moira values the first litre at $6.00 but gets it for $1.00, she makes a “profit” of $5.00 on that litre. Between her $3.00 valuation of the second litre and what she has to pay for it, she makes a “profit” of $2.00, a $1.00 profit on the third litre, and so on.
How can we calculate the total consumer surplus
For any unit consumed, consumer surplus is the difference between the maximum amount the consumer is willing to pay for that unit and the price the consumer actually pays.
What is total valuation? Where dose consumer surplus lie on a demand curve?
The total valuation is the area below her demand curve, and consumer surplus is the part of the area that lies above the price line.
What does the market demand curve show?
The market demand curve shows the valuation that consumers place on each unit of the product. For any given quantity, the area under the demand curve and above the price line shows the consumer surplus received from consuming those units.
The early economists thought the price, or “value” of a good, depended only on the demand by consumers. This view left out two important aspects of the determination of price that we now understand….
First, supply plays just as important a role as demand in determining price.
Second, consumers purchase units of a good until the marginal value of the last unit purchased is equal to its market price.
What conditions lead to Large and small consumer surplus?
Water has a high total value and a low price, which leads to a large consumer surplus; diamonds have a low total value and a high price, and therefore relatively little consumer surplus.
What two things must we understand in order to resolve the paradox of value?
The paradox of value can be resolved by understanding
(1) the market price of a good depends on both demand and supply,
(2) the difference between the total and marginal value that consumers place on a good. Water has a low price and low marginal value, but a high total value. Diamonds have a high price and high marginal value, but a low total value.
What is the paradox of value?
The paradox of value is the contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.
Under what condition do consumers stop purchasing a unit of a good?
Consumers purchase units of a good until the marginal value of the last unit purchased is equal to its market price.
How can we determine when the total value that consumers place on a unit of good has increased?
The area under the demand curve is a measure of the total value placed on all of the units that the consumer consumes. When the demand curve shifts to the right, the area under D1 exceeds the area under D0 so the total value that consumers place on X increases.
How do we determine that marginal value that consumers place on one additional unit of a product?
The marginal value that consumers place on one additional unit is given by the product’s market price
