Lectures in Microeconomics-Charles W. Upton Consumer Surplus and Indifference Curves

Consumer Surplus We have defined Consumer Surplus in terms of demand curves. Can we provide a formal definition in terms of utility functions? P D Q

Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo Budget

Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo

Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo

Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo X1X1

Consumer Surplus and Indifference Curves A Formal Definition X Widgets XoXo X1X1 Consumer Surplus = X 1 - X o

Consumer Surplus and Indifference Curves The Equation A consumer has income of x o

Consumer Surplus and Indifference Curves The Equation A consumer has income of x o He gets the chance to purchase at a price p o He purchases q o

Consumer Surplus and Indifference Curves The Equation A consumer has income of x o He gets the chance to purchase at a price p o He purchases q o Let his utility function be U(X, q)  defines consumer surplus U(x o -p o q o, q o ) = U(x o + , 0)

Consumer Surplus and Indifference Curves The Equation U(x o -p o q o, q o ) = U(x o + , 0) Units of good purchased

Consumer Surplus and Indifference Curves The Equation U(x o -p o q o, q o ) = U(x o + , 0) Units of good purchased Amount to spend on other goods.

Consumer Surplus and Indifference Curves The Equation U(x o -p o q o, q o ) = U(x o + , 0) Units of good purchased Amount to spend on other goods. Dollars that would represent an equal increase in utility.

Consumer Surplus and Indifference Curves One of a Kind A consumer has income of x o He gets the chance to buy a one of a kind item for p o His Utility Function is U(x,N)

Consumer Surplus and Indifference Curves One of a Kind A consumer has income of x o He gets the chance to buy a one of a kind item for p o His Utility Function is U(x,N) X = Dollars spend on everything but the item

Consumer Surplus and Indifference Curves One of a Kind A consumer has income of x o He gets the chance to buy a one of a kind item for p o His Utility Function is U(x,N) X = Dollars spend on everything but the item N= 0 (doesn’t buy) N=1 (buys)

Consumer Surplus and Indifference Curves An Application A consumer has income of x o He gets the chance to buy a one of a kind item Let U(x o -p o, 1) = U(x o + , 0)  defines consumer surplus

Consumer Surplus and Indifference Curves Willingness to Pay A consumer has income of x o He gets the chance to a buy a one of a kind item

Consumer Surplus and Indifference Curves Willingness to Pay A consumer has income of x o He gets the chance to a buy a one of a kind item Let U(x o - , 1) = U(x o, 0)  defines the maximum amount he is willing to pay

Consumer Surplus and Indifference Curves A Comparison Consumer Surplus U(x o -p o, 1) = U(x o + , 0)

Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0)

Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0)  + p o  

Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0)  + p o  

Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0) Suppose I am given a rare beautiful painting.

Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0) Significant consumer surplus.

Consumer Surplus and Indifference Curves A Comparison Willingness to Pay U(x o - , 1) = U(x o, 0) Consumer Surplus U(x o -p o, 1) = U(x o + , 0) But would I be willing to pay that much?

Consumer Surplus and Indifference Curves End ©2003 Charles W. Upton