Tutorial -- Consumer Surplus

© 1999 - 2004
Douglas A. Ruby

Market Analysis

Price Elasticity of Demand

Indifference Curves

A Consumer Optimum

Consumer Surplus

Microeconomics

Tutorial: Consumer Surplus

1) You may adjust the value for the P_market (the Market Price) by clicking on the boldfaced number in the number box.
2) Press the Plot Value button to see the value of each unit consumed.
3) Press the Show Demand button to plot the Demand curve.
4) Press the Surplus / Expenditure button to see shaded areas representing these values.
5) Press Reset to start over.
Answers are below

A. Given a market price P_mkt of $4.00:

(i) Press 'Show Demand' & 'Plot Value', what quantity is demanded by the consumer? Why won't the consumer demand one additional unit of this good?

(ii) given this quantity demanded, what is the Total Value of consumption?

(iii) what is the total level of consumer expenditure?

(iv) what is the numeric difference between Total Value and Total Expenditure? What is this difference called and what does it represent?

B. Press Reset and then change the market price P'_mkt of the good to $5.00. Repeat question 'A' (parts: i - iii).
(i) Given this price change did Total Expenditure increase or decrease? Explain this change.
(ii) Is the consumer better or worse off with this $1.00 increase in price? How much better or worse off?
(iii) Provide an intuitive explanation for this change in consumer welfare.

C. If the market price were to increase to $8.50, what would be the quantity demanded by the consumer? Explain.

Answers...

A. i. At a market price 'P_mkt'of $4.00, quantity demanded 'Q_d'is equal to 8 units.
The consumer will not demand a 9^th unit because the value in consumption of this unit is less than the market price -- the consumer will choose to use any additional income on other goods.

ii. The Total Value of consumption is equal to $46.00

TV =$46.00 = $7.50 + $7.00 + $6.50 + $6.00 + $5.50 + $5.00 + $4.50 + $4.00.

iii. Consumer expenditure = (P_mktQ_d = $32.

iv. The numeric difference between Total Value and Expenditure = $14.00 -- is known as Consumer Surplus. This value represents a measure of consumer welfare in the purchase and consumption of the 8 units of this good.

B. (i) When the market price 'P'_mkt' increases to $5.00, quantity demanded declines to 6 units -- Total Expenditure ($5 x 6 units) falls to $30. This change in expenditure occurs because demand is price elastic in this price range -- %ΔQ_[-]_d < %Δ_[+]P_mkt.

(ii) The consumer is Worse Off. At a quantity demanded of 6 units, Total Value' is $36.50 less Total Expenditure of $30.00 resulting in a smaller value of Consumer Surplus equal to $6.50. The change in this surplus measure 'Δ_[-]' is equal to $7.50. A $1.00 increase in market price results in a $7.50 reduction in consumer welfare.

(iii) The consumer is worse off because it is now necessary to pay a higer price for each unit consumed and the consumer is consuming a smaller quantity of this good.

C. At a market price 'P"_mkt' of $8.50, quantity demanded is equal to zero. The benefit of consuming even the first unit is now below this market price -- the consumer has been "priced-out" of the market. In the diagram above, the consumer's reservation price is equal to $8.00. For any market price above this value, the consumer will choose not to participate in this market.