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Consumer Behavior and Demand Theory
I. Special Notes: Our Current Events Internet Library has an interesting economics section.
II. Satisfaction received and limited budgets determine consumer demand.
III. Utility analysis
I always envy people that have something in life for which they have no diminishing utility. Do you know anyone? What was the product. If they are young, do you think their utility function will stay constant. Can you give a formula for the utility of different products and different people. Use fake names like PopPie for a friend who works out all the time and each hour and each day is equally as enjoyable.
|Number Purchased||Total Utility||Marginal Utility||
B. Utility maximizing rule
be purchased assuming utility is to be maximized and all the money is to be spent.
X costs $3
|Y costs $2||Z costs $1|
Econ Concepts in 60 Seconds Utility Maximizing Video
IV. Economic surplus From Wikipedia, the free encyclopedia
The term surplus is used in
economics for several situations. The consumer
surplus (sometimes named consumer's surplus or
consumers' surplus) is the amount that consumers benefit by
being able to purchase a product for a price that is less than
Note that producer surplus generally flows through to the owners of the factors of production: in perfect competition, no producer surplus accrues to the individual firm. This is the same as saying that economic profit is driven to zero. Real-world businesses generally own or control some of their inputs, meaning that they receive the producer's surplus due to them: this is known as normal profit, and is a component of the firm's opportunity costs. If the markets for factors are perfectly competitive as well, producer surplus ultimately ends up as economic rent to the owners of scarce inputs such a land.
On a standard
supply and demand (S&D) diagram, consumer surplus (CS) is the
triangular area above the price level and below the demand curve,
government intervenes by implementing, for example, a
tax or a
subsidy, then the graph of supply and demand becomes more
complicated and will also include
Combined, the consumer surplus, the producer surplus, and the
government surplus (if present) make up the social surplus or
the total surplus. Total surplus is the
A basic technique of
bargaining for both parties is to pretend that their surplus is
less than it really is: sellers may argue that the price they ask
hardly leaves them any
In some schools of
heterodox economics, the economic surplus denotes the total
income which the
ruling class derives from its ownership of scarce
factors of production,
The individual consumer surplus is the difference between the
maximum total price a consumer would be willing to pay (or
reservation price) for the amount he buys and
The maximum price a consumer would be willing to pay for a given
amount is the sum of the maximum price he would be willing to pay
for the first unit, the maximum
One bargaining tactic is to pretend a lower consumer surplus.
The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on the figure of the aggregate demand curve.
Calculation from supply and demand
The consumer surplus (individual or aggregated) is the area under
the (individual or aggregated) demand curve and above a horizontal
line at the actual price (in the
Where Pmkt is the equilibrium price (where supply
equals demand), Qmkt is the total quantity purchased at
the equilibrium price and Pmax is the price at which the
The graph shows, that if we see a rise in the equilibrium price and a fall in the equilibrium quantity, then consumer surplus falls.
Distribution of benefits when price falls
When supply of a good expands, the price falls (assuming the
demand curve is downward sloping) and consumer surplus increases.
This benefits two groups of people.
Consider an example of linear supply and demand curves. For an
initial supply curve S0, consumer surplus is the triangle
above the line formed by price P0 to the
Some people were willing to pay the higher price P0.
When the price is reduced, their benefit is the area in the
rectangle formed on the top by P0, on the bottom
The second set of beneficiaries are consumers who buy more, and
new consumers, those who will pay the new lower price (P1)
but not the higher price (P0).
Rule of one-half
The rule of one-half estimates the change in surplus for
small changes in supply with a constant demand curve. Note that in
this special case where the consumer
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V. Consumer's and Producer's Surplus
A) Econ Concepts in 60 Seconds Video on Consumer's and Producer's Surplus
B) Allocation efficiency exists at the equilibrium quantity and at other quantities, there are efficiency losses or Deadweight Loss.
C. Applying Consumer Surplus Using Tariffs and Quotas Video from ACDC Economics
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VI. Normal Goods, consumers buy more as income rises, Inferior
Goods, lest as income rises.
Note: Maximizing Behavior from Cyber Economics has a more in depth analysis.
Suggest something of Interest to
How about some Normal and Inferior Goods.
Is Adam Sandler Normal?
What goods will you buy less of as you get rich?
Contributing Class will be recognized!
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