Consumer Surplus Flashcards
Definitions
What is Consumer Surplus?
Consumer surplus is a measure of social welfare and is the area under the demand curve defined by the price level of the good and measures the net benefit of consuming x(p) units.
How do you calculate changes in consumer surplus because of a price change or added tax?
the change in CS is the area under the demand curve for price 1 - area under D for price 2. Use the integration and integrate the demand function and then substitute the prices into the equations.
What are some problems with CS?
Not real, and the change in CS is more useful then just CS. For example Uber, CS doesnt account for taxi driver losses.
What are two other welfare effects?
Compensating variation and Equivalent variation
What is Compensating Variation? What happens to the Budget line After the price change?
E.g., Price of Good 1 rises, So there is a new budget line with a new set of relative prices between the two goods. CV is the smallest amount of additional income required to move the new budget line just tangent to the original indifference curve. The budget line will shift outwards untill tangent with old IC.
What is equivalent variation? How do you get from BL2 to BL3?
The equivalent variation is the smallest amount of income that can be taken away from the consumer before the price change so that they are as well of as they would be if the price change happened (e.g. change in economic policy or tax). The budget line after the price change is tangent to a new IC. The Third budget line before calculating the EV is the budget line still tangent to the new IC but at the original prices. EV = m - m’’, where m is the income for BL1 and m’’ is income for BL3.
What is indirect utility?
Indirect utility is the utility that we would expect for the consumer at the optimal bundle.
What is Producer Surplus?
Producer Surplus is the area between the supply curve and the price at which the supply x(p) units of goods at. it is a measure of welfare and is the difference between how much a supplier actually is selling x* for and how low they would be willing to sell x*.
How can we use CS, CV, EV, and PS?
We can use these measures of welfare to calculate the net social benfits and costs to consumers and producers in a market when there is an economic policy change for example.
