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

Behavioural economics, An economics branch which keep concentrate on illumi...

An economics branch which keep concentrate on illumination the economic decisions people make in practice, particularly when these conflict with what conventional economic theory p

What is average revenue and average revenue curve, What is average revenue ...

What is average revenue and average revenue curve Average Revenue:   The average revenue is the total revenue separated by the level of output. It is therefore the price.

Arbitration, Arbitration The use of a third party to describe between ...

Arbitration The use of a third party to describe between two sides dead locked in a negotiation. The arbitrator's decision can be binding or not binding, as before agreed upon

Point elasticity, Point elasticity: It refers to measurement of elasticity ...

Point elasticity: It refers to measurement of elasticity on a point On a demand curve. Point elasticity helps in measuring elasticity where change in price and quantity is infinite

Withdrawing mrtp restrictions, Withdrawing MRTP Restrictions: The res...

Withdrawing MRTP Restrictions: The restriction on the scrutiny of an investment proposal that it does not violate the provisions of MRTP Act was withdrawn. This freed big bus

Utility and constrained optimization , Suppose the price of books is $15, t...

Suppose the price of books is $15, the price of movies is $5, and your income is $75. Assuming you have a desire to reach constrained optimization, how many movies will you buy? Ho

Gross domestic product and growth rates, Gross Domestic Product and Growth ...

Gross Domestic Product and Growth Rates: The rate of growth of the secondary and tertiary sectors has been more than double that of the primary sector, with the secondary sect

Diseconomics of scale, is a hotdog vendor''s stand a good example of diseco...

is a hotdog vendor''s stand a good example of diseconomics of sale?

Demand and supply, During the 1990s, technological advance reduced the cost...

During the 1990s, technological advance reduced the cost of computer chips. Explain, with the use supply and demand diagrams, how the following markets are affected in terms of pr

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