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

PRICE OF WHEAT (p)
p f
p c
Supply
using demand and supply. Figure 5.9 shows the demand and supply
curves for wheat. For the sake of simplicity, supply is drawn as a vertical
line (inelastic supply). In the absence of a price floor, the equilibrium
price will be p c , and the consumer surplus is the total of the
yellow and orange areas. If the government imposes a price floor, at
p f , then the quantity demanded is Q f . Consumer surplus is equal to
the yellow area, the area under the demand curve from the vertical
axis to the quantity purchased. The price floor reduces consumer
surplus. The orange area measures the cost to consumers of the
price floor.
Demand
Figure 5.9
Q f
QUANTITY OF WHEAT (Q )
CONSUMER SURPLUS AND A PRICE FLOOR
The demand and supply of wheat are equal if the price is
p c . At this price, total consumer surplus is equal to the
area between the demand curve, showing willingness
to pay, and the market price, p c . This is the sum of the
yellow and orange areas. With a price floor at p f , the
quantity demanded is only Q f . At the price p f , consumer
surplus is the yellow area. The orange area measures the
fall in consumer surplus due to the price floor.
Wrap-Up
CONSUMER SURPLUS
Consumer surplus is the difference between what individuals would
have been willing to spend to purchase a given amount of a good and
what they actually had to spend. It is measured by the area under the
demand curve, but above the price.
Consumer surplus provides a measure of the benefit to consumers
of the market exchange for the good.
Looking Beyond the Basic Model
In the market economy, “For whom are goods produced?” has a simple answer: goods
are produced for consumers. Thus to understand market economies, we must understand
how consumers make choices. The model of budget constraints and individual
preferences sketched in this chapter is the economist’s basic approach to consumer
choice, a powerful one whose insights carry well beyond this course. Still, it has been
criticized, and in the past few decades, alternative models of consumer choice have
been proposed. In the remainder of this chapter, we discuss four criticisms of the basic
model before turning to recent work that goes under the name behavioral economics.
HOW WELL DO THE UNDERLYING
ASSUMPTIONS MATCH REALITY?
The first criticism of the basic model of consumer choice is that it fails to reflect the
actual thought processes of consumers. This line of criticism is like the claim of a
pool player that the physicist’s model of motion, which predicts with great precision
how billiard balls will interact, is invalid because players do not work through
the equations before taking a shot. The appropriate question is whether the eco-
118 ∂ CHAPTER 5 THE CONSUMPTION DECISION