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Consumer Choice:
Indifference Theory
Chapter 4
LIPSEY & CHRYSTAL
ECONOMICS 13e
The area under the demand curve shows the total valuation
that consumers place on all units consumed.
For example, the total value that consumers place on q0 units
is the entire area shaded red and green under the demand
curve up to q0.
At a market price of p0 the amount paid for q0 units is the red
area.
Hence consumers surplus is the green area under the
demand curve and above p0.
Consumers’ Surplus
• Consumers’ surplus is the difference between [1] the
value consumers place on their total consumption of
some product and [2] the actual amount paid for it.
• The first value is measured by the maximum they
would pay for the amount consumed rather than go
without it completely.
• The second is measured by market price times
quantity.
A 30 5
B 18 10
C 13 15
D 10 20
E 8 25
F 7 30
35
a
30
Quantity of clothing per
25
g
week
20 b
15
c
d
10 e
f
h
T
5
5 10 15 20 25 30 35
Quantity of food
I5
I4
I3
I1 I2
Vegetables
I2
I2
I2 I1
I1
I1
0 0 0
[i]. Packs of green pins [ii]. Right hand gloves [iii]. Meat
I2
I1 0 I2
w f0 0 b I1
0
[iv]. Water [v]. Food [vi]. Good X
30
25
20
15
10
5 10 15 20 25 30 35
30
a b
25
c
20
E
15
10 I5
d
I4
5 e
I3
f I2
I1
5 10 15 20 25 30 35
Income-consumption line
Quantity of clothing per week
E3
E2
E1
I3
I2
I1
Price-consumption
line
Quantity of clothing per week
E1
E2 E3
I3
I2
I1
b c d
Lipsey & Chrystal: Economics, 13th edition Quantity of food per week
The Price-consumption Line
Price-consumption line
[£ per month]
E2
E1
E0
I2
I0 I1
0.75 x
y
0.50 Demand curve
0.25 z
0 60 120 220
a
Value of all other goods [£ per week]
a1
E0
E1
Substi I1
tution
effect