Loading...

Messages

Proposals

Stuck in your homework and missing deadline? Get urgent help in $10/Page with 24 hours deadline

Get Urgent Writing Help In Your Essays, Assignments, Homeworks, Dissertation, Thesis Or Coursework & Achieve A+ Grades.

Privacy Guaranteed - 100% Plagiarism Free Writing - Free Turnitin Report - Professional And Experienced Writers - 24/7 Online Support

Economists normally assume people's preferences should be

07/12/2021 Client: muhammad11 Deadline: 2 Day

Unit 4 Discussion

Read and consider the “Willingness to Pay” example in Section 7-1 (Chapter 7 Section 1).

Now find and evaluate the willingness to pay, consumer surplus, demand, producer surplus, cost and willingness to sell of your own example. (products to consider: online ticket sales to sporting events, Vegas shows, eBay products, etc).

Chapter 7

7-1 Consumer Surplus

We begin our study of welfare economics by looking at the benefits buyers receive from participating in a market.

7-1a Willingness to Pay

Imagine that you own a mint-condition recording of Elvis Presley’s first album. Because you are not an Elvis Presley fan, you decide to sell it. One way to do so is to hold an auction.

willingness to pay the maximum amount that a buyer will pay for a good

Four Possible Buyers’ Willingness to Pay Four Elvis fans show up for your auction: Taylor, Carrie, Rihanna, and Gaga. They would all like to own the album, but each of them has a limit on the amount she is willing to pay for it. Table 1 shows the maximum price that each of the four possible buyers would pay. A buyer’s maximum is called her willingness to pay, and it measures how much that buyer values the good. Each buyer would be eager to buy the album at a price less than her willingness to pay, and she would refuse to buy the album at a price greater than her willingness to pay. At a price

TABLE 1

Four Possible Buyers’ Willingness to Pay Buyer Willingness to Pay

Taylor $100

Carrie 80

Rihanna 70

Gaga 50

equal to her willingness to pay, the buyer would be indifferent about buying the good: If the price is exactly the same as the value she places on the album, she would be equally happy buying it or keeping her money.

To sell your album, you begin the bidding process at a low price, say, $10. Because all four buyers are willing to pay much more, the price rises quickly. The bidding stops when Taylor bids $80 (or slightly more). At this point, Carrie, Rihanna, and Gaga have all dropped out of the bidding because they are unwilling to bid any more than $80. Taylor pays you $80 and gets the album. Note that the album has gone to the buyer who values it most highly.

What benefit does Taylor receive from buying the Elvis Presley album? In a sense, Taylor has found a real bargain: She is willing to pay $100 for the album but pays only $80. We say that Taylor receives consumer surplus of $20. Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

Consumer surplus measures the benefit buyers receive from participating in a market. In this example, Taylor receives a $20 benefit from participating in the auction because she pays only $80 for a good she values at $100. Carrie, Rihanna, and Gaga get no consumer surplus from participating in the auction because they left without the album and without paying anything.

Now consider a somewhat different example. Suppose that you had two identical Elvis Presley albums to sell. Again, you auction them off to the four possible buyers. To keep things simple, we assume that both albums are to be sold for the same price and that no one is interested in buying more than one album. There-fore, the price rises until two buyers are left.

In this case, the bidding stops when Taylor and Carrie bid $70 (or slightly higher). At this price, Taylor and Carrie are each happy to buy an album, and Rihanna and Gaga are not willing to bid any higher. Taylor and Carrie each receive consumer surplus equal to her willingness to pay minus the price. Taylor’s consumer surplus is $30, and Carrie’s is $10. Taylor’s consumer surplus is higher now than in the previous example because she gets the same album but pays less for it. The total consumer surplus in the market is $40.

7-1b Using the Demand Curve to Measure Consumer Surplus

Consumer surplus is closely related to the demand curve for a product. To see how they are related, let’s continue our example and consider the demand curve for this rare Elvis Presley album.

We begin by using the willingness to pay of the four possible buyers to find the market demand schedule for the album. The table in Figure 1 shows the demand schedule that corresponds to Table 1. If the price is above $100, the quantity demanded in the market is 0 because no buyer is willing to pay that much. If the price is between $80 and $100, the quantity demanded is 1 because only Taylor is willing to pay such a high price. If the price is between $70 and $80, the quantity demanded is 2 because both Taylor and Carrie are willing to pay the price. We can continue this analysis for other prices as well. In this way, the demand schedule is derived from the willingness to pay of the four possible buyers.

Figure 1 Graph will not copy

The graph in Figure 1 shows the demand curve that corresponds to this demand schedule. Note the relationship between the height of the demand curve and the buyers’ willingness to pay. At any quantity, the price given by the demand curve shows the willingness to pay of the marginal buyer, the buyer who would leave the market first if the price were any higher. At a quantity of 4 albums, for instance, the demand curve has a height of $50, the price that Gaga (the marginal buyer) is willing to pay for an album. At a quantity of 3 albums, the demand curve has a height of $70, the price that Rihanna (who is now the marginal buyer) is willing to pay.

Because the demand curve reflects buyers’ willingness to pay, we can also use it to measure consumer surplus. Figure 2 uses the demand curve to compute consumer surplus in our two examples. In panel (a), the price is $80 (or slightly above) and the quantity demanded is 1. Note that the area above the price and below the demand curve equals $20. This amount is exactly the consumer surplus we computed earlier when only 1 album is sold.

Figure 2 Graph will not copy

Panel (b) of Figure 2 shows consumer surplus when the price is $70 (or slightly above). In this case, the area above the price and below the demand curve equals the total area of the two rectangles: Taylor’s consumer surplus at this price is $30 and Carrie’s is $10. This area equals a total of $40. Once again, this amount is the consumer surplus we computed earlier.

The lesson from this example holds for all demand curves: The area below the demand curve and above the price measures the consumer surplus in a market. This is true because the height of the demand curve represents the value buyers place on the good, as measured by their willingness to pay for it. The difference between this willingness to pay and the market price is each buyer’s consumer surplus. Thus, the total area below the demand curve and above the price is the sum of the consumer surplus of all buyers in the market for a good or service.

7-1c How a Lower Price Raises Consumer Surplus

Because buyers always want to pay less for the goods they buy, a lower price makes buyers of a good better off. But how much does buyers’ well-being rise in response to a lower price? We can use the concept of consumer surplus to answer this question precisely.

Figure 3 Graph will not copy

Figure 3 shows a typical demand curve. You may notice that this curve gradually slopes downward instead of taking discrete steps as in the previous two figures. In a market with many buyers, the resulting steps from each buyer drop-ping out are so small that they form a smooth curve. Although this curve has a different shape, the ideas we have just developed still apply: Consumer surplus is the area above the price and below the demand curve. In panel (a), consumer surplus at a price of P1 is the area of triangle ABC.

Now suppose that the price falls from P1 to P2, as shown in panel (b). The consumer surplus now equals area ADF. The increase in consumer surplus attributable to the lower price is the area BCFD.

This increase in consumer surplus is composed of two parts. First, those buyers who were already buying Q1 of the good at the higher price P1 are better off because now they pay less. The increase in consumer surplus of existing buyers is the reduction in the amount they pay; it equals the area of the rectangle BCED. Second, some new buyers enter the market because they are willing to buy the good at the lower price. As a result, the quantity demanded in the market increases from Q1 to Q2. The consumer surplus these newcomers receive is the area of the triangle CEF.

7-1d What Does Consumer Surplus Measure

Our goal in developing the concept of consumer surplus is to make judgments about the desirability of market outcomes. Now that you have seen what consumer surplus is, let’s consider whether it is a good measure of economic well-being.

Imagine that you are a policymaker trying to design a good economic system. Would you care about the amount of consumer surplus? Consumer surplus, the amount that buyers are willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it. Thus, consumer surplus is a good measure of economic well-being if policymakers want to satisfy the preferences of buyers.

In some circumstances, policymakers might choose to disregard consumer sur-plus because they do not respect the preferences that drive buyer behavior. For example, drug addicts are willing to pay a high price for heroin. Yet we would not say that addicts get a large benefit from being able to buy heroin at a low price (even though addicts might say they do). From the standpoint of society, willingness to pay in this instance is not a good measure of the buyers’ benefit, and consumer surplus is not a good measure of economic well-being, because addicts are not looking after their own best interests.

In most markets, however, consumer surplus does reflect economic well-being. Economists normally assume that buyers are rational when they make decisions. Rational people do the best they can to achieve their objectives, given their opportunities. Economists also normally assume that people’s preferences should be respected. In this case, consumers are the best judges of how much benefit they receive from the goods they buy.

Homework is Completed By:

Writer Writer Name Amount Client Comments & Rating
Instant Homework Helper

ONLINE

Instant Homework Helper

$36

She helped me in last minute in a very reasonable price. She is a lifesaver, I got A+ grade in my homework, I will surely hire her again for my next assignments, Thumbs Up!

Order & Get This Solution Within 3 Hours in $25/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 3 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

Order & Get This Solution Within 6 Hours in $20/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 6 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

Order & Get This Solution Within 12 Hours in $15/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 12 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

6 writers have sent their proposals to do this homework:

Helping Engineer
Top Essay Tutor
Isabella K.
Coursework Helper
Custom Coursework Service
Supreme Essay Writer
Writer Writer Name Offer Chat
Helping Engineer

ONLINE

Helping Engineer

I am a PhD writer with 10 years of experience. I will be delivering high-quality, plagiarism-free work to you in the minimum amount of time. Waiting for your message.

$32 Chat With Writer
Top Essay Tutor

ONLINE

Top Essay Tutor

This project is my strength and I can fulfill your requirements properly within your given deadline. I always give plagiarism-free work to my clients at very competitive prices.

$15 Chat With Writer
Isabella K.

ONLINE

Isabella K.

I am an experienced researcher here with master education. After reading your posting, I feel, you need an expert research writer to complete your project.Thank You

$19 Chat With Writer
Coursework Helper

ONLINE

Coursework Helper

I will provide you with the well organized and well research papers from different primary and secondary sources will write the content that will support your points.

$50 Chat With Writer
Custom Coursework Service

ONLINE

Custom Coursework Service

I am an academic and research writer with having an MBA degree in business and finance. I have written many business reports on several topics and am well aware of all academic referencing styles.

$40 Chat With Writer
Supreme Essay Writer

ONLINE

Supreme Essay Writer

I reckon that I can perfectly carry this project for you! I am a research writer and have been writing academic papers, business reports, plans, literature review, reports and others for the past 1 decade.

$18 Chat With Writer

Let our expert academic writers to help you in achieving a+ grades in your homework, assignment, quiz or exam.

Similar Homework Questions

Secretary livestock punjab contact - Airius destratification fans price list - Killing us softly 4 citation - 1800-2400 words cultural Psyc essay - Excel remembers the last ____ actions you have completed - The growth of cities worksheet - Economics can best be described as the study of - St clements surgery birmingham - Hoyt sector model pdf - Frankenstein literary analysis essay - Implementation phase of the nursing process - Paper - P - Charles sturt university assignment cover sheet - Malcolm x learning to read pdf - All ears rabbit stud - Skip level meeting employee perspective - Nicola barr bent agency - Eco 550 final exam - Animal farm study guide questions answer key - Measuring simple harmonic motion - Math concepts - Ideality factor for silicon diode - 100 word question - 5x5 for advanced lifters - Philosophy matrix chart - Https icampus strayer edu login - Academic Integrity Assignment - Homework c9 2 recall 1 - Eris in the odyssey - Galvanic voltaic cells worksheet answers - World History - How to overcome von neumann bottleneck - I am a bit confused - Power/Leadership - OB - Rotter incomplete sentence blank - Sorin inc a company that produces - Why is lopeswrite a valuable tool for students - Api 675 pump types - Blue gold world water wars answers - Deutsche allgemeinversicherung case - Annotated Bibliography - Musculi pectinati vs pectinate muscle - Divide 35 in the ratio of 3 4 - Gratitude letter to parents - Leadership Journal - Vce study score bell curve - Young vic directors programme - Application security - External influences on food choices - Enthymeme in the media - Balanced and unbalanced forces worksheet - 20 page power point - Moral dilemma scenarios for elementary students - Lenscrafters case study - Challenges in the Business Environment - Cognitive walkthrough pros and cons - Project Observation Assignment Cognitive and Language Development Update - Brabham enterprises manufactures tires for the formula - Can you recycle batiste dry shampoo - Elephant driver or keeper crossword clue - Aqualisa quartz case analysis ppt - MBA - Main - Set 10 - Alexander cowan business model canvas - Dyson distribution and supply chain strategy - Glenmoor country club wedding - Pr4 - Gas meter box replacement responsibility - What are the principles of the texas constitution - Examples of characteristic properties - DQ - Julius caesar conclusion paragraph - Angel investing david rose pdf - Azure reserved vm instances are an example of opex - Alterations in pulmonary functions - Nursing and Community (Due 24 hours) - 6318 mccartney ln garland tx 75043 - Hp officejet 6100 cartridge lights blinking - The night thoreau spent in jail reading guide answers - 4 4 practice graphing a function rule - Proj 587 week 5 case study - Emergency planning team - Nab connect log in - The great plant escape - TLDQ3-2 - Drama script on animals - Violence in ancient rome - Https www shipmap org - University of maribor erasmus - Ann taylor survival in specialty retail - Structure of a flower - Glassware accuracy lab report - Which of the following accounts is a temporary account - Honey possum digestive system - Immediate skill shortage list nz - Respond to the following: - Infj humanmetricswhy is it important to address opposing point of views within your argumentative essay? - Hunter united credit union - F train roosevelt island - Criminal Law