Consumer and producer surplus
Total Consumer Surplus as Area Looking at consumer surplus as area between the demand curve and the market price
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- Let's say you were in a orange stand
- And this right here is the demand curve for your orange stand or your marginal benefit curve
- or really called the willingness to pay
- that very hundredth pound, someone would be willing to pay 3 dollars per pound
- but the 101st pounds would be a little less than that
- So that's the willingness to pay, or the marginal benefit of that incremental pound
- But let's say you decide to set the price at 2 dollars
- and you are able to sell 300 oranges in that week
- I want think about what is the total consumer surplus that your consumers got
- The way to think about consumer surplus is how much benefit above and beyond what they paid
- So for example, the person who bought--let's just think about the exact hundredth pound
- The hundredth pound, they paid two dollars
- but their benefit looks like $3.30
- but they only paid two dollars, so their benefit on that 1 pound
- or their consumer surplus is 3.30 minus [2]
- So that person that bought 100th pound--
- not all of the 100 lbs, just that 100th pound--
- got a consumer surplus of 3.30-2 dollars
- which is a $1.30 consumer surplus
- So if you want to figure out the entire consumer surplus
- you just have to do it for all of the pounds
- So that was the 100th pound, you would find--
- you could do this as the area of this little thing here
- Let me zoom in to make sure that you understand what was going on
- That thing that I just drew if I zoom in will look something like this
- It was one pound wide
- and this here was two dollars
- Then we had our marginal benefit curve or demand curve sloping down like that
- This point right over here was $3.30
- So to figure out the consumer surplus for that pound, we say, for that pound
- they were willing to pay $3.30, the benefit to them was $3.30, but they only had to pay $2
- So the height of this here was $1.30
- So consumer surplus is $1.30 per pound times 1 pound
- and so that's what we got, the $1.30 consumer surplus
- Now we can do that for every one of the pounds
- So we can do that for the 101st pound. We would do it like that
- Then the 102nd pound, you would do it like that
- 103rd pound, like that; you do it for the 99th pound, like that
- You can imagine if you want to find the total consumer surplus what are we doing
- We're essentially just finding the area between our demand curve
- and this line where the price is 2
- So we're just to sum up this area
- And if you're familiar with calculus you might know
- that you can actually make these things arbitrarily small
- you can take smaller and smaller--you don't have to take a 1-pound wide rectangle
- You can take a half-pound wide rectangle, a quarter-pound wide rectangle
- then you'll just have more rectangles
- It doesn't matter so much if you have a linear demand curve
- but if you have a nonlinear demand curve
- then it would matter. You want to get thinner and thinner and thinner rectangles
- so you can get better and better approximations for the consumer surplus
- But needless to say what you're really doing especially if you get unbelievably thin
- rectangles and you have unbelievably high number of them
- you're really just estimating the area under the demand curve and above the price equals $2
- And so if you want to know the consumer surplus--
- I really want you to understand why this was. Just think about it for each pound
- just whoever bought that pound, how much more value they get, relative to what they paid
- and we're just summing that up across all of the pounds
- So to really figure the total consumer surplus
- we just have to find the area, this blue area. That's just finding the area of a triangle
- So this here, you have a base of 300. This length here is 300 lbs
- And our height over here--we can just use this as the area of a triangle
- because this is a simple linear demand curve
- You would actually have to use a little bit of calculus if this was a nonlinear curve
- but the height here is 2
- So our area, the area between the demand curve and our price equals two is equal to
- 1/2 times base times height which is 1/2 times 300 lbs times two dollars / lb
- The pounds cancel out; 1/2 times 2 is 1, times 300 is 300
- So we get 300 dollars
- So the total consumer surplus in this case is $300
- This really is the area between the demand curve and this price=2 line right over there
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