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__ CONSUMER SURPLUS __ Consumer surplus is the difference between the amount that consumers will pay for a good and the total amount that they actually pay.



Consumer Surplus and Price Elasticity of Demand Consumer surplus is zero when the demand for a good or service is perfectly elastic, because the price that people are willing to pay equals what they actually pay. This will usually happen in very competitive markets.

When demand is inelastic then consumer surplus is infinite, because there is a greater consumer surplus since there are buyers who are willing to pay a higher price in order to continue consuming the good.



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Changes in Demand and Consumer Surplus

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Then there are shifts in the demand curve there will be a change in the equilibrium market price and the quantity, therefore the consumer surplus will change. According to the diagram on the left there is an increase in demand. The equilibrium price rises and the quantity increases. The consumer surplus is higher because there is more being bought at a higher price than it was before. In the diagram on the right there are effects of a cost reducing innovation, which causes an increase in supply, a lower price, an increase in the quantity, and a rise in consumer surplus.

Calculating Consumer Surplus



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The equilibrium price is $5 and the quantity is 5 units of the good. The demand curve shows that people are willing to pay $9 for the 1 good, $8 for the 2, $7 for the 3, and $6 for the 3. However, people can buy 5 units of this good with only $5 per unit of good. The surpluses from the 1 unit is 9-5=$4. The sum of all the surpluses is the consumer surplus: $4+$3+$2+$1= $10. The 10 is only an estimation of the consumer surplus.

The actual surplus is found by finding the are below the demand curve and above the price. The area consists of a triangle with a length of 5 and the height of 5. To find the area ½ base x height: ½ 5 x 5=12.5.

Real Life Example of Consumer Surplus

http://www.chicagotribune.com/news/daywatch/ct-flat-screen-tv-prices-plunge,0,2525333.story

Article: During the 2010 fall and Christmas seasons, the prices of flat screen TV's saw a fairly significant drop in price as compared to what the cost in 2009.

How is this an example of consumer surplus?

Consumers expected to pay a higher price for flat screen TV's because the year before they were more expensive. Say a consumer was willing and able to buy a TV for $500, last year's price. But now, TV's are cheaper. Maybe that same TV is now $450. The consumer experiences a $50 consumer surplus because they would have spent $500, but they only ended up spending $450. ($500 - $450 = $50).

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Article: “Searching sites like eBay.com and Overstock.com is one way to furnish your place for less. You can also head to the flea market. "Going to the flea market and investing in the fabric and labor for upholstery is a good way to save money and have a quality finished piece," said Timshell Rivers, 38, an interior designer in New York. To get the best deals on fabric, look for warehouse sales such as those put on by New York's ABC Carpet & Home. Rivers also combs vintage stores for china, flatware and stemware."You can have mismatched pieces or choose a certain pattern and hunt it when you hit the flea markets," said Rivers. "It looks cool and it's a fun project." When decorating her daughter's nursery, Elizabeth Justema, 32, went with a theme of one of her favorite artists, Stephen Huneck. She paid up for three of his signed lithographs, then matted and framed four photos she clipped from one of his coffee table books. "You can't really tell the difference," she said.”

How is this an example of consumer surplus?

This article illustrates our concept because in a flea market, people obtain goods at prices much lower than they are willing to pay, assuming that they barter successfully. When people go into flea markets, they take with them a certain amount of money that they are willing to spend on goods, and usually not all of this money is spent on the goods that they buy.

Video on Consumer Surplus

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