ECO 2030 1nd Edition Lecture 17Outline of Last Lecture I. ElasticitiesOutline of Current Lecture II. Welfare EconomicsIII. Consumer SurplusIV. Producer SurplusCurrent Lecture● Welfare Economics - how the allocation of resources affects well being○ has nothing to do with government programs● WTP = maximum amount a buyer will pay for a good● Consumer Surplus = the amount a buyer is WTP minus the amount you actually pay (Savings or internal happiness)(CS=WTP-P)WTP and the demand curve with 4 potential buyersName WTP for an Ipod Anthony $250Chad 175Flea 300John 125● At any point Q, the height ofthe demand curve = WTP ofthe MArginal Buyer● Note the shape of thedemand curve is jaggedbecause there are only 4buyers in this market● A market with many buyers isa straight lineThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.● CS = ½(base x height)Understanding the graph and CS:● If P = $260 then the only buyer is Flea. Her CS = (40x1) = 40● If P = $125 or less, then thedemand will be 4 and CS will bethe greater area above that price.● Each person has their individualCS as shown above with Fleas CS.To get total CS the CS of all buyersis added up . Both Consumer Surplus (CS) andProducer Surplus (PS) are measured bythe area shown in the graph CS with lots of buyers (demand is nowsmooth)CS = ½(base x height)● If the price goes from P1 to P2 andthe demand is the same then the CSwill be the area above the P2 priceline, therefore price has an effect onCS.● Producer Surplus - is the amount aseller is paid minus thesellers cost (Profit)○ PS - related to thesupply curve as CSis related to thedemand curve○ The area below theprice and above thesupply curvemeasures the PS inthe market (like thegraph above)If P = $600 then Grandma’s PS = $100If the P = $800 then total PS is thesum of Grandma’s and Georgia’sPS and so forthGrandma’s PS increases from$100 to $300 and Georgias PS is$200So total PS =
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