REVIEW FOR FURTHER EXPLANATIONS, PLEASE READ Wonderling, David; Reinhold Gruen & NickBlack (2005), Introduction to Health Economics, England: London School of Hygiene & Tropical Medicine.

Consumer surplus : The difference between what a consumer pays for a good and the maximum they would be willing to pay for it.

Consumer surplus Consumer surplus is the value placed on goods by consumers minus the cost to the consumers. The area under the demand curve represents the value placed on the good by consumers. The area under the price line represents the cost to the consumers. Hence the consumer surplus is the area between the demand curve and the price line. The dotted area in the Figure 3.10 indicates the consumer surplus associated with the original position.

More than 200 years ago, Adam Smith posed a paradox: water, which is essential to life itself, costs little, but diamonds, which are useless compared with water, are expensive. Why? Adam Smith could not solve the paradox. Not until the theory of marginal utility had been developed could anyone give a satisfactory answer.

You can solve Adam Smith’s puzzle by distinguishing between total utility and marginal utility. The total utility that we get from water is enormous. But remember, the more we consume of something, the smaller is its marginal utility. We use so much water that the marginal utility – the benefit we get from one more glass of water – diminishes to a tiny value. Diamonds, on the other hand, have a small total utility relative to water, but because we buy few diamonds, they have a high marginal utility

The consumer surplus after the health promotion programme is indicated by the enlarged dotted area shown in Figure The gain in consumer surplus is therefore the dotted area to the right of D1, the original demand curve.

Budget Line The limits to individual consumption choices are described by a budget line. To make the concept of the individual’s budget line as clear as possible, we’ll consider a simplified example of one individual – Lisa – and her choice. Lisa has an income of £30 a month to spend. She spends her income on two goods – cinema films and cola. Cinema tickets cost £6 each; cola costs £3 for a six- pack. If Lisa spends all of her income, she will reach the limits to her consumption of films and cola.

Preferences and Utility Economists use the concept of utility to describe preferences. The benefit or satisfaction that a person gets from the consumption of a good or service is called utility The concept of utility helps us make predictions about consumption choices in much the same way that the concept of temperature helps us make predictions about physical phenomena

Total utility Total utility is the total benefit or satisfaction that a person gets from the consumption of goods and services. Total utility depends on the person’s level of consumption – more consumption generally gives more total utility.

Marginal utility Marginal utility is the change in total utility resulting from a one-unit increase in the quantity of a good consumed.

Explanations Figure 3.8(a) illustrates the total utility that Lisa gets from seeing films. As you can see, the more films Lisa sees in a month, the more total utility she gets. Part (b) illustrates her marginal utility. This graph tells us that as Lisa sees more films, the marginal utility that Lisa gets from seeing films decreases. For example, her marginal utility from the first film is 50 units, from the second 38 units, and from the third 33 units. We call this decrease in marginal utility as the consumption of a good increases the principle of diminishing marginal utility...