Page 144 - The Principle of Economics

146 PART THREE
SUPPLY AND DEMAND II: MARKETS AND WELFARE
HOW A LOWER PRICE RAISES CONSUMER SURPLUS
Because buyers always want to pay less for the goods they buy, a lower price makes buyers of a good better off. But how much does buyers’ well-being rise in response to a lower price? We can use the concept of consumer surplus to answer this question precisely.
Figure 7-3 shows a typical downward-sloping demand curve. Although this demand curve appears somewhat different in shape from the steplike demand curves in our previous two figures, the ideas we have just developed apply nonetheless: Consumer surplus is the area above the price and below the demand curve. In panel (a), consumer surplus at a price of P1 is the area of triangle ABC.
Figure 7-3
HOW THE PRICE AFFECTS
CONSUMER SURPLUS. In panel
(a), the price is P1, the quantity
demanded is Q1, and consumer
surplus equals the area of the
triangle ABC. When the price
falls from P1 to P2, as in panel (b),
the quantity demanded rises
from Q1 to Q2, and the consumer P1 surplus rises to the area of the
triangle ADF. The increase in
consumer surplus (area BCFD)
occurs in part because existing
consumers now pay less (area
BCED) and in part because new
consumers enter the market at
the lower price (area CEF).
Price
P1
P2
0
Price
(a) Consumer Surplus at Price P1
A
Consumer surplus
Demand
BC
0
Q1
(b) Consumer Surplus at Price P2
Quantity
A
Initial consumer surplus
B
D
Additional consumer surplus to initial consumers
C
E
Consumer surplus to new consumers
F
Demand
Q1 Q2
Quantity