homework, demand, consumer-surplusIf I want to buy some milk. If I have a downward demand curve, the price and the amount I’m willing to buy as below:
P Q
10 1
9 2
5 3
Now the market price is $5 so I buy 3 bottles of milk for $15.
The problem is, do I get any ‘consumer surplus’? My textbook says the consumer surplus is
(10-5)+(9-5)+(5-5) = 9
But I doubt it. Since I’m willing to pay $15 for 3 bottles of milk, the value of these milk(for me) should be about $15. So I don’t get any consumer surplus, do I?
You paid 15$ for the 3 bottles of milk. But that was a bargain since you valued the three bottles 24$ (bottle1: 10$ + bottle2: 9$ + bottle3: 5$).
Your monetary expenditures: 15$
Your utility gain: 24$
Your surplus: 9$
Then you say: if my surplus is 24$ and they charged me 8$ for 3 bottles I would buy it anyway (surplus 24 = cost 24) so why that’s not in the demand?
First, if the price of milk was 8$ you’d be better off buying only 2 bottles. You’d have surplus 19$ (bottle1+bottle2) and cost 16$ with a surplus of 3$ (better than 0). Buying the third bottle is actually deleterious.
And this explains why it’s important to read demand as representing marginal changes.
Consumer surplus is the difference between the largest price you are willing to pay and the price you are actually paying for each unit. I would say that you would be willing to pay $10+9+5=24$ for the 3 quarts at the most. Here's a graphical example that will relate this to the familiar triangle calculation.
Also, you should probably add the homework tag to you question.
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