[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

CONSUMER SURPLUS
In Chapter 1, we learned that one of the basic principles of economics is that
people are better off as a result of voluntary trade. Now that we have developed
the fundamental ideas of consumer choice, we can use the demand curve
to show how we can measure some of the gains that arise from economic
exchange.
Assume you go into a store to buy a can of soda. The store charges you $0.75.
If you are particularly thirsty, you might be willing to pay as much as $1.25 for that
can of soda. The difference between what you paid and what you would have been
willing to pay is called consumer surplus. It provides a measure of how much
you gained from the trade. In this example, you only had to pay $0.75 for something
for which you would have been willing to pay $1.25; the difference, or $0.50,
is your consumer surplus.
Earlier, we used the concept of marginal utility to determine Mary’s choice of
sweatshirts and pizzas. We can calculate from her demand curve the consumer
surplus that goes to Mary when she buys pizza. Suppose a pizza costs $10 and Mary
buys 13. From the information in Table 5.1, we can see that the 13th pizza gives her
a marginal utility of 10 and costs $10. But the 12th pizza she purchased also only
cost her $10, yet it yielded a marginal utility of 12. Mary is getting a bargain; she
would have been willing to pay more for the earlier pizzas. She would have been
willing to pay $12 for the 12th pizza. In fact, for her first pizza, she would
have been willing to pay $36, for the second $32, and so on. She would have
been willing to pay a total of $288 ($36 + $32 + $30 + $28 + $26 + $24 + $22
+ $20 + $18 + $16 + $14 + $12 + $10) for the 13 pizzas. The difference between
what she has to pay for 13 pizzas—$10 × 13 = $130—and what she would
have been willing to pay, $288, is her consumer surplus. In this example, her
surplus is $158.
Figure 5.8 shows Mary’s demand curve for pizzas. If the price of pizzas
is $36, she would purchase 1 pizza; if the price falls to $20, she would buy
8; and at a price of $10, she would buy 13. The total amount Mary would
have been willing to pay for 13 pizzas is the total area under the demand
curve between the vertical axis and 13, the combination of the blue and
yellow areas. This area is the sum as detailed in the previous paragraph.
The amount Mary actually has to pay is represented by the blue area—the
price, $10, times the quantity, 13 pizzas. Her consumer surplus is the
difference, the yellow area above the price line and below the demand
curve, over the range of the quantity purchased.
There is always some consumer surplus so long as the consumer has
to pay only a fixed price for all the items she purchases. The downward
slope of demand curves means the previous units the consumer purchases
are more valuable than the marginal units. She would have been willing
to pay more for the earlier units than for the last unit, but she does
not have to.
We can use the concept of consumer surplus to measure the effect on
consumers of the type of agricultural price floor we analyzed in Chapter 4
PRICE
40
36
32
28
24
20
16
12
10
8
4
0
Figure 5.8
Consumer surplus
Demand
1 2 3 4 5 6 7 8 9 10 11 12 13 14
NUMBER OF PIZZAS
CONSUMER SURPLUS
The demand curve plots the amount Mary would be
willing to pay for her 1st, 2nd, 3rd, and so on pizza.
The total amount she is willing to pay for 13 pizzas
is the area under the demand curve up to the 13th
pizza. The amount she actually has to pay is the
blue shaded area. The consumer surplus is the difference
between the two, the yellow shaded area
above the line and below the demand curve, over
the range of the quantity purchased.
UTILITY AND THE DESCRIPTION OF PREFERENCES ∂ 117