You will notice that I have labeled the market equilibrium – the equilibrium price is $12and the equilibrium quantity is 400.How did I find the equilibrium? Set demand equal to supply!In equilibrium, set
Now, let’s turn our attention to the concept of consumer surplus. We will begin with thedefinition:
– Consumer surplus is the difference between what a consumer(s)would have been willing to pay for a certain quantity of a good, and what thatconsumer(s) actually had to pay.To get a firm grasp of what consumer surplus is all about, let’s return to our CD example.If we use our demand function, then we may determine what a consumer would have been willing to pay for the first CD sold in the market - $19.98. Where does this figurecome from?
If Q is equal to one, then:98.1902.020)1(20
Therefore, for the first CD a consumer is willing to pay $19.98. What did that consumer actually have to pay? The equilibrium price of $12! Therefore, the consumer who waswilling to pay $19.98 is able to enjoy a “surplus” of $7.98 (the difference between whatthey were willing to pay $19.98, and what they had to pay $12.)The important thing to notice is that there will be surplus of this sort associated withevery CD sold except the very last one! (The 400
.) How can we calculate the totalconsumer surplus that is being enjoyed by consumers in the compact disc market?Well, the easiest way to do this is to return to our graph…