Consumer surplus PDF

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Consumer surplus - The inverse of the demand curve can be though as the willingness to pay curve.! - For all units consumed, the price payed is the market price.! - The differences between how much one is willing to pay for an extra unit and how much is payed is a measure of the benefit from purchasing an extra unit.!

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- The difference between the consumer’s reservation price and ordinary demand curves is due to income effects.!

- But if the consumer’s utility function is quasilinear or perfect substitutes in income, then there are no income effect and consumer surplus is an exact measure of gains-to-trade.!

- We can rearrange to the following:!

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- Consumer’s surplus is an exact dollar measure of utility gained from consuming commodity 1 when the consumer’s utility function is quasilinear in commodity 2.!

- The change of total utility due to a change in P1 is approximately the change in her consumer’s surplus.!

- Changes in consumer surplus - The numbers given from consumer surplus are just representative, what we care about is about the changes as a result from policy changes.!

- Compensating and equivalent variations - Compensating variation (CV): measures how much M.U must be paid to those affected to -

compensate their loss (ex-post perspective.) It measures the least extra income at the new prices, to restore original utility.! Equivalent variation (EV): measures how much M.U would consumers pay to avoid being worse-off (ex-ante perspective.) It measures the least extra income at the original prices, to match original utility with the new utility.! In quasilinear utility CS=EV=CV!

Example of calculating CV, EV and CS for CD!

Example for perfect complements:...