Theory of consumer surplus, Microeconomics

Assignment Help:

THEORY OF CONSUMER SURPLUS:

We discuss the basic concept of consumer surplus and its derivation. A consumer normally pays less for a commodity than the maximum amount that she would be willing to pay rather than forego its consumption. Consumer surplus therefore in crude sense is the difference between what consumer willing to pay and what she actually pays. Several measures of such consumer's surplus  have been proposed. We will discus three of them. Attention is limited to a consideration of the good under investigation and a composite commodity called "money", with consumption  quantities of q and M respectively. Let the distance OA in Figure represents the consumer's income. She achieves a tangency solution at point D on indifference curve I2. If she were unable to consume Q, she would be at A on the lower indifference curve I1. She would have to be given an income increment of AB dollars to restore her to indifference curve I2. This increment, called compensating income variation, is denoted by c, and provides a measure of consumer's surplus.  

1537_THEORY OF CONSUMER SURPLUS.png

961_THEORY OF CONSUMER SURPLUS1.png

At the given prices, the consumer would be willing to forgo AC dollars of income rather than lose her opportunity to consume good Q. With income OC, her consumption is at E, which is on the same indifference curve as A. The amount corresponding to AC is called equivalent income variation and is denoted by e. It provides an alternative measure of consumer's surplus. A third measure is provided by the demand curve in Figure for the price-quantity combination p0q0. It equals the area ABp0, which is the difference between the area lying under the demand curve OABp0 and the consumer's expenditure Op0Bq0, and is denoted by s. 

It can be shown that c ≥ s ≥ e. The strict inequalities hold for the case pictured in Figure as a consequence of the income effect. If the consumer were to pay more to consume the good, her demand would decline because of her lower effective income, and the area under the demand curve would exceed the amount that she would pay rather than forego consumption of the good. Figure depicts a case in which the income effect is zero throughout. A perpendicular such as the line through D and E connects points with the same marginal rate of substitution. The indifference curves are "parallel" with a constant vertical distance between a pair of indifference curves. In this case AB=AC and the three measures of consumer's surplus are the same.   


Related Discussions:- Theory of consumer surplus

#syndicated oligopoly, Could I have examples of syndicated and organized ol...

Could I have examples of syndicated and organized oligopolies with companies as examples

Macroeconomics, 8,000,000 people in the population who are 16 yrs of age an...

8,000,000 people in the population who are 16 yrs of age and older. 80% are willing to work. Currently 10% unemployment rate. a. how many people in labor force? b. How many are un

3rd degree price discrimination(monopoly), What is third degree price discr...

What is third degree price discrimination? Explain with case analysis,give two successful & unsuccessful cases of 3rd degree price discrimination.

Internal and external economies of scale, Internal and external economies o...

Internal and external economies of scale: Internal economies of scale are the advantages or benefits that the firm enjoys as it expands its size or increases its scale of ope

Physical properties of s block elements, group trend including ionic and at...

group trend including ionic and atomic radii,electron affinity,electronegativity,charge density and ionization potential

Explain how normal profit and abnormal profit differ, Explain how normal pr...

Explain how normal profit and abnormal profit differ. Normal profit (breakeven) - which must contain commentary on the inclusion of opportunity costs. Abnormal profit should be

Economic models, what is the use of models in economics?

what is the use of models in economics?

Scacity, if a commodity has limited demand , should economist say that we s...

if a commodity has limited demand , should economist say that we still have a scarcity ?

Elasticity, elasticity concept in policy formulation

elasticity concept in policy formulation

Economics, What happens when oil eventually runs out?? can''t we just pay ...

What happens when oil eventually runs out?? can''t we just pay doctors and nurses more money?? The unemployed should get off their backsides and get a job??

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd