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Consumer surplus as difference between marginal benefit and price paid. Created by Sal Khan.
Video transcript
In the last video we saw how you can actually view a demand curve as actually a marginal benefit curve that for any given quantity of the good you're selling that point on the curve is actually showing the marginal benefit for that incremental unit so this is the marginal benefit for that first unit this is the marginal benefit for that second unit - and there's multiple ways that you can view this assuming that we're talking about this new car here, maybe if you're gonna only sell one unit, someone really wants it really bad the benefit for them, the marginal benefit for that first unit for them, is going to be $60,000 now let's say if you want to sell 2 units, that 2nd unit might be bought by that same person and they might say I already have one car, the benefit of getting that 2nd one is only $50,000 that's the point at which I am neutral, that's the point at which I'm right on the fence of wanting to buy that car or it might be another person, another person who's just not as enamoured as the first person that says ok, for $50,000 I do like that car. and then for the third person there, once again, they're not as enamoured as the first two, they would be willing to buy it for $40,000. and what we saw is, at some point that you could say, for whatever reason, the price ends up being $30,000 and so when the price is $30,000 we saw (and this is kinda doing it in the traditional notion of at a price what quantity we're selling) but when you think about that reality, what's actually happening is that this 4th person is right on the fence - their marginal benefit is exactly $30,000 so in their mind they're saying "I am giving away $30,000 and in exchange for that I am getting something that's worth $30,000." so it's kind of like, hey would you be willing to trade this dollar for a dollar, well you'd probably be kind of on the fence about that you're very close to going either way - you feel like it's a good deal if you could get it for a penny less and it's a bad deal if you're getting it for a penny more so right on the fence, but you're gonna just barely get this 4th person to transact at this price but what we hinted at, is if you have one price for everybody (and in the future we'll talk about not having one price for everybody) but if you did have one price for everyone, these first units were kind of sold below where they could have been sold they were sold below their marginal benefit so remember, we're doing the same demand curve as a marginal benefit curve so this first unit right over here, it could have been sold at $60,000, but now we're selling it for $30,000 so this right over here, this was $30,000 (I'll just write 30 for $30,000) the marginal benefit is $30,000 higher than the actual price the marginal benefit of that unit, the benefit that the market got out of it is $30,000 higher than the price the marginal benefit for the 2nd unit is $20,000 higher than the price at which the product is being sold the marginal benefit for this 3rd unit is $10,000 or another way to think about it is, the consumer surplus for this first unit was $30,000 the consumers got $30,000 more in marginal benefit (value for themselves) than they had to pay for it here, the consumer surplus was $20,000. the consumer got $20,000 more in value than that 2nd consumer was willing to pay for it and here's $10,000, and then this 4th consumer is neutral the marginal benefit is what they paid for it and so when you think about this, you say "well what's the total consumer surplus here?" and another way of thinking about it is "what's the total excess of marginal benefit above and beyond the price paid?" so how much surplus marginal benefit did they get if you take out the price paid? and over here the total consumer surplus is going to be the $30,000 for that first unit plus the $20,000 for that 2nd unit plus the $10,000 for that 3rd unit and so the total consumer surplus in this scenario when we sold 4 units at $30,000 is (and we're assuming we're selling cars here - we can't sell parts of cars like 1.1 cars, I guess if we're talking about averages maybe we could but let's just say that we're selling whole numbers of cars here) the total consumer surplus in this situation is 30 + 20 + 10 which is $60,000 (everything's in thousands) so this is $60,000 so in this scenario, in that week, the consumers would get $60,000 more in benefit for them, in perceived benefit for them, than what they actually had to pay for it and if you think about it it's a little unideal for the seller, because they were selling something at a lower price than maybe what they could have gotten from at least this first few consumers here and that was because they just had to set one price