Principles of Microeconomics Lecture 9 – Consumer Surplus

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.
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