MeasuringWillingnessto Pay and MarginalBenefit
Marginal benefit (MB) is the increase in benefit from, or the
willingness to pay for, one more unit of a good. As a person
consumes more and more of a good, the marginal benefit from
additional amounts is likely to diminish. Imagine you are very
hungry, there is no food in the house, and you are craving
pizza. At this point you might be willing to pay $5.00 for a
big, hot slice of pizza. Now suppose you already had that slice
of pizza, but you're still a little hungry. You might be willing
to pay $3.00 for an additional slice, but not an additional $5.00.
The more pizza you have, the less you are willing to pay for
more, and the less marginal benefit.
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MeasuringWillingnessto Pay and MarginalBenefit
(cont.)
The table below shows willingn ,ess to pay and marginal benefit
(MB). If you don't buy any pizza, the quantity is O and so is
your willingness to pay and the benefit from buying it. If you
buy 1 slice of pizza, you may be willing to pay $5 and your
benefit is $5. If you buy a second slice, you won't pay $5, but
maybe $3, and thus $3 is you marginal benefit.
.ess
g
fe>r
a. I g
a
<>
0
S0
2
3
$8.0
'0
$9 _ 50
ss_oo
S
5
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. 00
.SO
~--- s
_oo --
_o
$3_0
S l _5
$
_Q
ConsumerSurplus
In many cases, people are willing to pay more for an item
consumed than they have to. You might be willing to pay two
times the $8 admission price (P) to see your favorite movie.
But like everyone else in line, you pay only $8, even though it
is worth $16 to you. The difference between the $16, the
marginal benefit (MB) price, and the $8 is called consumer
surplus (CS). Consumer surplus is the difference between
your willingness to pay for an item (say $16 for a movie), and
the price you actually paid for it ($8). In this case, the
consumer surplus is $8 ($16-$8).
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ConsumerSurplus(cont.)
The total consumer surplus would be the marginal benefit
(M~) of each unit minus the price (P) per unit, For example, at
$3 per unit, the total consumer surplus of consuming 3 units is:
$12-$3 + $8-$3 + $5-$3 or $16. But, if we go further, you'll
see that the more that is consumed, the less marginal benefit is
obtained and eventually the price per unit is more than the
marginal benefit. At $3 per unit, the total consumer surplus of
consuming 5 units is: $12-$3 + $8-$3 + $5-$3 + $3-$3 +
$2-$3==$15. Buying less can sometimes be more beneficial.
(CS).
Quantity
Total Benefit r'1
n
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1
2
3
4
$12
$20
$25
$28
5
$30
--1 ..,,
I
a ...
; s
s-~
d
_, _
3
:Ji- ~ 01
MeasuringWastefromInefficiency
An attractive feature of competitive markets is that they
maximize consumer surplus (CS) and producer surplus (PS).
Graphically, th,e producer surplus for all producers is the area
above the supply curve and below the market price line. The
consumer surplus for all consumers is the area below the
demand curve and above the market price line. The lightly
shaded gray area is the sum of consumer surplus plus producer
surplus _(A=l/2bh + A=l/2bh). A Market
Price
S(MC)
h....
«~a,. .
'llJaJh
Af h - p ====CS ellel}t
Market
•
price
line and
Pe
Qe
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Quantity
ConsumerSurplus(cont.)
Graphically, total consumer surplus (CS) would be calculated
using the formula for finding the area of a triangle: A==1/2 x
base x height, or A==1/2bh. The consumer surplus is the area
below the D/MB line and above the market price line because
even though consumers are willing to pay up to the D/MB line,
most only pay up to the market price line. Below, the
consumer surplus would be $16: 10-6==4, so h==4,and quantity
demanded (Qd) ==8, sob== 8. 8 x 4 divided by 2 == 16.
A Market
Price
10
6tO
Consumer Surplus
\0~ A
~"'
A
8 consumer
J\1arket
surplus
. . -.. 6 p.!!ll!!l~~~!!!!!!!!!!!!!~
price hne
4
A===
112 bh
~
4 X 8==32 I 2==$16
I
I
I
:
:
s~s
: \l~ s
8
10
_____________
I \)
2 ......._
2
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Supply (MC)
4
6
\0
Demand (MB)
Quantity
ConsumerSurplus-Questions
49. Consutner surplus in a rnarket for a good exists
because
(A) binding ptice floors encourage producers
to increase the supply of the good
(B) some con utner would be willing to pay
rnore than the equili briutn price of the good
(C) when the price of the good decreases most
consurners increase their de1nand for the
good
(D) producers do not have market power to set
their own price
(E) some produce r charge different prices
for the good in different 1narkets
33. Consumer urplu ex i ts beca use of the
(A) surplus of money tl1at wealth y consumers
hold
(B) surplus in rnarginal product that firms get
when they hire an additional worker
(C) willingnes of some con umers to pay a price
higher than the market price for some units
of a good
(D) additional utility that households obtain when
the prices of substitutes fall
(E) increase in the availability of goods \vhen
.
.
1nco1ne n es
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ConsumerSurplus-Questions
49. Consutner surplus in a rnarket for a good exists
because
(A) binding ptice floors encourage producers
to increase the supply of the good
some con utner would be willing to pay
rnore than the equili briutn price of the good
(C) when the price of the good decreases most
consurners increase their de1nand for the
good
(D) producers do not have market power to set
their own price
(E) some produce r charge different prices
for the good in different 1narkets
ce
33. Consumer urplu ex i ts beca use of the
(A) surplus of money tl1at wealth y consumers
hold
(B) surplus in rnarginal product that firms get
when they hire an additional worker
•
willingnes of some con umers to pay a price
higher than the market price for some units
of a good
(D) additional utility that households obtain when
the prices of substitutes fall
(E) increase in the availability of goods \vhen
.
.
1nco1ne n es
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