Presentation is loading. Please wait.

Presentation is loading. Please wait.

1 Consumer’s Surplus Molly W. Dahl Georgetown University Econ 101 – Spring 2009.

Similar presentations


Presentation on theme: "1 Consumer’s Surplus Molly W. Dahl Georgetown University Econ 101 – Spring 2009."— Presentation transcript:

1 1 Consumer’s Surplus Molly W. Dahl Georgetown University Econ 101 – Spring 2009

2 2 Inverse Demand Functions Taking quantity demanded as given and then asking what the price must be describes the inverse demand function of a commodity.  Usually we ask “Given p 1 what is the quantity demanded of x 1 ?”  But we could also ask the inverse question “Given that the quantity demanded is x 1, what must p 1 be?”

3 3 Inverse Demand Functions p1p1 x1*x1* p1’p1’ Given p 1 ’, what quantity is demanded of commodity 1? Answer: x 1 ’ units. x1’x1’

4 4 Inverse Demand Functions p1p1 x1*x1* p1’p1’ x1’x1’ Given p 1 ’, what quantity is demanded of commodity 1? Answer: x 1 ’ units. The inverse question is: Given x 1 ’ units are demanded, what is the price of commodity 1? Answer: p 1 ’

5 5 Consumer’s Surplus p1p1 CS Consumer’s surplus is the consumer’s utility gain from consuming x 1 ’ units of commodity 1.

6 6 The change to a consumer’s total utility due to a change to p 1 is approximately the change in her Consumer’s Surplus. Change in Consumer’s Surplus

7 7 p1p1 p 1 (x 1 ), the inverse ordinary demand curve for commodity 1

8 8 Change in Consumer’s Surplus p1p1 CS before p 1 (x 1 )

9 9 Change in Consumer’s Surplus p1p1 CS after p 1 (x 1 )

10 10 Change in Consumer’s Surplus p1p1 Lost CS p 1 (x 1 )

11 11 In Class: Calculating Consumer Surplus

12 12 Changes in a firm’s welfare can be measured in dollars much as for a consumer. Producer’s Surplus

13 13 Producer’s Surplus y (output units) Output price (p) S = Marginal Cost

14 14 Producer’s Surplus y (output units) Output price (p) S = Marginal Cost

15 15 Producer’s Surplus y (output units) Output price (p) S = Marginal Cost Revenue =

16 16 Producer’s Surplus y (output units) Output price (p) S = Marginal Cost Variable Cost of producing y’ units is the sum of the marginal costs

17 17 Producer’s Surplus y (output units) Output price (p) S = Marginal Cost Variable Cost of producing y’ units is the sum of the marginal costs Revenue less VC is the Producer’s Surplus.

18 18 Cost-Benefit Analysis Can we measure in money units the net gain, or loss, caused by a market intervention; e.g., the imposition or the removal of a market regulation? Yes, by using measures such as the Consumer’s Surplus and the Producer’s Surplus.

19 19 Cost-Benefit Analysis Q D, Q S Price Supply Demand p0p0 q0q0 The free-market equilibrium

20 20 CS Cost-Benefit Analysis Q D, Q S Price Supply Demand p0p0 q0q0 The free-market equilibrium and the gains from trade generated by it. PS

21 21 CS Cost-Benefit Analysis Q D, Q S Price Supply Demand p0p0 q0q0 PS q1q1 Consumer’s gain Producer’s gain The gain from freely trading the q 1 th unit.

22 22 CS Cost-Benefit Analysis Q D, Q S Price Supply Demand p0p0 q0q0 The gains from freely trading the units from q 1 to q 0. PS q1q1 Consumer’s gains Producer’s gains

23 23 CS Cost-Benefit Analysis Q D, Q S Price Supply Demand p0p0 q0q0 The gains from freely trading the units from q 1 to q 0. PS q1q1 Consumer’s gains Producer’s gains

24 24 CS Cost-Benefit Analysis Q D, Q S Price p0p0 q0q0 PS q1q1 Consumer’s gains Producer’s gains Any regulation that causes the units from q 1 to q 0 to be not traded destroys these gains. This loss is the net cost of the regulation.

25 25 Tax Revenue Cost-Benefit Analysis Q D, Q S Price q0q0 PS q1q1 An excise tax imposed at a rate of $t per traded unit destroys these gains. psps pbpb t CS Deadweight Loss

26 26 Cost-Benefit Analysis Q D, Q S Price q0q0 q1q1 An excise tax imposed at a rate of $t per traded unit destroys these gains. pfpf CS Deadweight Loss So does a floor price set at p f PS

27 27 Cost-Benefit Analysis Q D, Q S Price q0q0 q1q1 An excise tax imposed at a rate of $t per traded unit destroys these gains. pcpc Deadweight Loss So does a floor price set at p f, a ceiling price set at p c PS CS

28 28 Cost-Benefit Analysis Q D, Q S Price q0q0 q1q1 An excise tax imposed at a rate of $t per traded unit destroys these gains. pcpc Deadweight Loss So does a floor price set at p f, a ceiling price set at p c, and a ration scheme that allows only q 1 units to be traded. PS pepe CS Revenue received by holders of ration coupons.

29 29 Two additional dollar measures of the total utility change caused by a price change are Compensating Variation and Equivalent Variation. Compensating Variation and Equivalent Variation

30 30 p 1 rises. Q: What is the extra income that, at the new prices, just restores the consumer’s original utility level?  Or, after the policy has been implemented, how much must you be compensated to reach the same utility as before the policy? A: The Compensating Variation. Compensating Variation

31 31 Compensating Variation x2x2 x1x1 u1u1 p1=p1’p1=p1’p 2 is fixed.

32 32 Compensating Variation x2x2 x1x1 u1u1 u2u2 p1=p1’p1=p1”p1=p1’p1=p1” p 2 is fixed.

33 33 Compensating Variation x2x2 x1x1 u1u1 u2u2 p1=p1’p1=p1”p1=p1’p1=p1” p 2 is fixed.

34 34 Compensating Variation x2x2 x1x1 u1u1 u2u2 p1=p1’p1=p1”p1=p1’p1=p1” p 2 is fixed. CV = m 2 - m 1.

35 35 p 1 rises. Q: What is the extra income that, at the original prices, just restores the consumer’s original utility level?  Or, how much would you pay to avoid moving to the new policy? A: The Equivalent Variation. Equivalent Variation

36 36 Equivalent Variation x2x2 x1x1 u1u1 p1=p1’p1=p1’p 2 is fixed.

37 37 Equivalent Variation x2x2 x1x1 u1u1 u2u2 p1=p1’p1=p1”p1=p1’p1=p1” p 2 is fixed.

38 38 Equivalent Variation x2x2 x1x1 u1u1 u2u2 p1=p1’p1=p1”p1=p1’p1=p1” p 2 is fixed.

39 39 Equivalent Variation x2x2 x1x1 u1u1 u2u2 p1=p1’p1=p1”p1=p1’p1=p1” p 2 is fixed. EV = m 1 - m 2.

40 40 Consumer’s Surplus, Compensating Variation and Equivalent Variation When the consumer has quasilinear utility, CV = EV =  CS. Why? There are no income effects with quasilinear utility. Otherwise, EV <  CS < CV.


Download ppt "1 Consumer’s Surplus Molly W. Dahl Georgetown University Econ 101 – Spring 2009."

Similar presentations


Ads by Google