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5.3 CHANGE IN THE PRICE OF A GOOD: THE CONCEPT OF CONSUMER SURPLUS 181

$10
36
Demand for food, x = P x
P, price of food (dollars per unit) 6
8

4

2
FIGURE 5.20
Income Effect Consumer Surplus with an
When the price of food falls from $9 per unit
0 2 4 6 8 10 to $4 per unit, the consumer increases his food
x, units of food consumption from 4 units to 9 units. His consumer
surplus increases by the shaded area, or $29.20.

Still considering the consumer in Learning-By-Doing Exercise 5.9, let’s see what
happens if we measure consumer surplus using the area under the demand curve for
food. In Learning-By-Doing Exercise 5.4, we showed that his demand function for
food is x I (2P ). Figure 5.20 shows his demand curve when his income is $72. As
x
the price of food falls from $9 to $4 per unit, his consumption rises from 4 units to
9 units. The shaded area in Figure 5.20, which measures the increase in consumer sur-
plus, equals $29.20. Note that this increase in consumer surplus ($29.20) is different
from both the compensating variation ($24) and the equivalent variation ($36). Thus,
the change in the area under the demand curve will not exactly measure either the com-
pensating variation or the equivalent variation when the income effect is not zero.

APPLICA TION 5.5
How Much Would You Be Willing their effects on price levels and profits. Labor unions

to Pay to Have a Wal-Mart in Your sometimes also resist them over concerns about the im-
pact of these stores on the wages in local labor markets.
Neighborhood? Still, the wide variety and low prices offered by these
stores are presumably good for consumers. For example,
In the last 20 years, “big-box” mass-merchandise stores U.S. consumers make at least 25 percent of their food
such as Wal-Mart, Costco, and Target have proliferated expenditures at such stores. Thus, these stores could
throughout the United States. In contrast to traditional potentially have a large impact on consumer welfare.
retailers such as grocery stores, which concentrate on An important question is how big this impact is likely
one line of merchandise, big-box mass merchandisers to be.
sell a wide variety of consumer goods, including food, In a recent study, economists Jerry Hausman and
clothing, CDs, books, housewares, toys, sporting goods, Ephraim Leibtag shed light on this question by esti-
and much more. In addition to wide variety, the big- mating the benefits to consumers from the opening of
box mass merchandisers usually sell at discount prices. new Wal-Mart supercenters in local retail markets. 15
These stores often create controversy when they open. Using data on food expenditures of approximately
Competing stores often resist them aggressively, fearing 61,500 households from 1998 to 2001 in a variety of

15 Jerry Hausman and Ephraim Leibtag, “Consumer Benefits from Increased Competition in Shopping
Outlets: Measuring the Effect of Wal-Mart,” Journal of Applied Econometrics 22 (2007): 1157–1187.