Principles of Microeconomics Lecture 9 – Consumer Surplus
We cannot observe consumer utility
But we do observe what they consume
Using consumer demand function we can measure how much the consumer is willing to pay for each unit of
a given good
The willingness to pay gives us a monetary measure of how much the consumer values from consuming a
given good
Because of the income effect, the area below the demand curve is an ‘approximation’ of the consumer
surplus
In the case of a quasi-linear utility function, the are below the demand curve gives a precise measure of
consumer surplus
A reservation price curve describes sequentially the values of successive single units of a commodity
An ordinary demand curve describes the most that would be paid for q units of a commodity purchased
simultaneously.
Approximating the net utility gain area under the reservation-price curve by the corresponding area under
the ordinary demand curve gives the Consumer’s Surplus measure of net utility gain.
The difference between the consumer’s reservation-price and ordinary demand curves is due to income
effects.
But, if the consumer’s utility function is quasilinear in income then there are no income effects and
Consumer’s Surplus is an exact monetary measure of gains-to-trade.
We cannot observe consumer utility
But we do observe what they consume
Using consumer demand function we can measure how much the consumer is willing to pay for each unit of
a given good
The willingness to pay gives us a monetary measure of how much the consumer values from consuming a
given good
Because of the income effect, the area below the demand curve is an ‘approximation’ of the consumer
surplus
In the case of a quasi-linear utility function, the are below the demand curve gives a precise measure of
consumer surplus
A reservation price curve describes sequentially the values of successive single units of a commodity
An ordinary demand curve describes the most that would be paid for q units of a commodity purchased
simultaneously.
Approximating the net utility gain area under the reservation-price curve by the corresponding area under
the ordinary demand curve gives the Consumer’s Surplus measure of net utility gain.
The difference between the consumer’s reservation-price and ordinary demand curves is due to income
effects.
But, if the consumer’s utility function is quasilinear in income then there are no income effects and
Consumer’s Surplus is an exact monetary measure of gains-to-trade.
