Consumer surplus introduction | Consumer and producer surplus | Microeconomics | Khan Academy

Summary

The video script explains the concept of a demand curve as a marginal benefit curve, illustrating how each unit of a good sold reflects the marginal benefit to the consumer. It uses the example of selling cars at different prices to show how consumer surplus is created when the price is lower than the marginal benefit. The total consumer surplus is calculated as the sum of the differences between the marginal benefit and the price for each unit sold, highlighting a potential inefficiency for sellers who could have charged more for the first few units.

Takeaways

• 📈 The demand curve can be viewed as a marginal benefit curve, showing the marginal benefit for each additional unit sold.
• 🚗 For the first unit of a new car, the marginal benefit might be as high as $60,000 if someone really wants it.
• 📉 As more units are sold, the marginal benefit decreases; the second unit might have a marginal benefit of $50,000.
• 💸 The marginal benefit continues to decrease with each additional unit, reflecting diminishing marginal utility.
• 💵 If the price is set at $30,000, the fourth person is indifferent, with a marginal benefit equal to the price.
• 🤔 The concept of consumer surplus is introduced, which is the difference between what consumers are willing to pay and what they actually pay.
• 💲 Consumer surplus for the first unit is $30,000, for the second unit is $20,000, and for the third unit is $10,000.
• 🔢 The total consumer surplus in this scenario is $60,000, calculated by summing the surplus for each unit sold.
• 💼 From the seller's perspective, selling at a single price may result in lost revenue, as earlier units could have been sold at higher prices.
• 📚 The script hints at the concept of price discrimination, suggesting that selling at different prices to different consumers could maximize revenue.

Q & A

What is the relationship between the demand curve and the marginal benefit curve?

The demand curve can be viewed as a marginal benefit curve, where each point on the curve represents the marginal benefit for the incremental unit of the good being sold.

How does the marginal benefit change as more units are sold?

As more units are sold, the marginal benefit typically decreases because each additional unit is less valuable to the consumer than the previous one.

What is the marginal benefit for the first unit of the new car in the example?

The marginal benefit for the first unit of the new car is $60,000.

Why does the marginal benefit decrease from the first to the second unit in the example?

The marginal benefit decreases because the second car might be bought by the same person who already has one, or by someone else who values it less than the first buyer.

What is the marginal benefit for the third unit of the new car?

The marginal benefit for the third unit is $40,000, indicating that the third person is willing to pay that amount for the car.

How does the price affect the marginal benefit and consumer surplus?

When the price is set at $30,000, the marginal benefits for the first three units are higher than the price, creating a consumer surplus.

What is the consumer surplus for the first unit sold at $30,000?

The consumer surplus for the first unit is $30,000, which is the difference between the marginal benefit and the price paid.

How is the total consumer surplus calculated in the scenario?

The total consumer surplus is calculated by summing the consumer surplus for each unit sold, which is the difference between the marginal benefit and the price paid for each unit.

What is the total consumer surplus in the scenario where four units are sold at $30,000?

The total consumer surplus in this scenario is $60,000, which is the sum of $30,000, $20,000, and $10,000 for the first three units.

Why is it unideal for the seller to sell at a lower price than the marginal benefit for the first few consumers?

It's unideal for the seller because they could potentially sell the first few units at a higher price, capturing more revenue from those consumers who are willing to pay more.

What is the implication of setting one price for everyone in the context of the script?

Setting one price for everyone means that the seller might not maximize revenue from consumers who are willing to pay more, leading to potential lost revenue.

Outlines

00:00

🔍 Understanding Demand Curve as Marginal Benefit Curve

The video begins by explaining that a demand curve can also be viewed as a marginal benefit curve. Each point on the curve represents the marginal benefit of the good for a specific unit. For example, the marginal benefit for the first unit might be $60,000, while for the second unit it might be $50,000. This is because the perceived value decreases as more units are sold, either to the same or different buyers. The marginal benefit diminishes with each subsequent unit sold.

💸 Selling at a Fixed Price and Marginal Benefit

The speaker discusses what happens when the price is set at $30,000, where buyers' willingness to pay varies. The fourth buyer, who values the car exactly at $30,000, is indifferent, neither gaining nor losing. This scenario explores how fixed pricing influences buyers' decisions based on their marginal benefit, and why some buyers may feel neutral at this price point.

🛍️ Impact of a Uniform Price on Different Buyers

If a uniform price is applied to all buyers, the earlier units are sold for less than their marginal benefit value. For instance, the first car could have sold for $60,000, but is now sold for $30,000, resulting in a loss of potential revenue. This part emphasizes how a one-price-fits-all approach can lead to a discrepancy between the price and the marginal benefit for different buyers.

📈 Consumer Surplus Explained

The concept of consumer surplus is introduced, which refers to the difference between the price paid and the marginal benefit a buyer receives. The consumer surplus for the first car is $30,000, for the second car $20,000, and for the third car $10,000. This results in a total consumer surplus of $60,000, reflecting the total benefit buyers receive beyond what they paid.

💼 Total Consumer Surplus Calculation

In this final section, the total consumer surplus is calculated. By adding up the surpluses from the first three cars, the total surplus comes to $60,000. The speaker reflects on how this is a favorable situation for the buyers, but less ideal for the seller, who could have charged higher prices for earlier units. The seller’s limitation comes from needing to set a single price for all units.

Keywords

💡Demand Curve

A demand curve represents the relationship between the price of a good and the quantity demanded by consumers. In the video, it is also explained as a 'marginal benefit curve,' where each point on the curve reflects the marginal benefit or the value a consumer places on each additional unit of the good. For example, the first unit of a car may have a high marginal benefit of $60,000, while the second unit has a lower marginal benefit.

💡Marginal Benefit

Marginal benefit refers to the additional benefit or value a consumer receives from consuming one more unit of a good. The video explains how the demand curve can also be viewed as a marginal benefit curve, where each unit of a product (like a car) provides a different marginal benefit. For instance, the marginal benefit of the first car might be $60,000, while the second car is valued at $50,000.

💡Consumer Surplus

Consumer surplus is the difference between the amount a consumer is willing to pay for a good and the actual price they pay. The video discusses how the consumer surplus is the excess marginal benefit over the price paid. For example, the first consumer who values the car at $60,000 but buys it for $30,000 has a surplus of $30,000.

💡Price

Price is the amount a consumer must pay to purchase a good. In the video, the example uses a price of $30,000 for a car, which is the same for all consumers. The video points out how setting one price can lead to consumer surpluses for some buyers while others may just be on the fence about purchasing the product.

💡Quantity

Quantity refers to the number of units of a good that are sold or demanded at a given price. In the video, quantity is discussed in relation to how different consumers value different numbers of units. For instance, four units of cars are sold, and each buyer has a different willingness to pay, reflecting varying marginal benefits.

💡Marginal Benefit Curve

The marginal benefit curve is a way of interpreting the demand curve, where each point shows the marginal benefit of consuming an additional unit of a good. The video emphasizes this concept, illustrating how different buyers have different marginal benefits for each car they purchase, with the first car valued higher than subsequent cars.

💡Neutral Transaction

A neutral transaction occurs when the price paid by a consumer is exactly equal to the marginal benefit they receive. The video gives the example of the fourth consumer, who values the car at $30,000 and buys it for that exact amount, making it a neutral transaction where there is no consumer surplus.

💡Single Price Strategy

The single price strategy refers to the scenario where a seller sets one price for all consumers, regardless of their individual willingness to pay. The video highlights that this strategy leads to consumer surpluses for some buyers (who would have paid more) and neutral transactions for others (who are on the fence). This is illustrated by selling cars to multiple consumers at the same $30,000 price point.

💡Willingness to Pay

Willingness to pay is the maximum amount a consumer is willing to pay for a good. The video explains how different consumers have different willingness to pay based on their perceived value of the product. For example, one consumer may be willing to pay $60,000 for a car, while another is only willing to pay $50,000.

💡Excess Marginal Benefit

Excess marginal benefit is the difference between the marginal benefit of a good and the price paid for it. The video discusses how consumers who value the product higher than the price experience an excess marginal benefit. For instance, the first buyer of the car has an excess marginal benefit of $30,000, since the car's value to them is $60,000, but they pay only $30,000.

Highlights

The demand curve can be viewed as a marginal benefit curve.

Each point on the curve represents the marginal benefit for that incremental unit.

The first unit sold has a marginal benefit of $60,000.

The second unit sold might have a lower marginal benefit, around $50,000, if purchased by the same or another person.

As more units are sold, marginal benefit decreases; the third unit might be valued at $40,000.

If the price is set at $30,000, the fourth person is neutral, with their marginal benefit equal to the price paid.

If a single price is applied to all consumers, earlier units could have been sold at a higher price.

The first unit could have been sold for $60,000, but is instead sold for $30,000, generating a $30,000 consumer surplus.

The second unit's marginal benefit is $50,000, but with the price at $30,000, the consumer surplus is $20,000.

The third unit's marginal benefit is $40,000, generating a $10,000 consumer surplus with a $30,000 price.

The fourth unit has no consumer surplus, as the marginal benefit equals the price paid at $30,000.

Total consumer surplus in this scenario is $60,000 from all four units.

Consumer surplus is the total excess of marginal benefit above the price paid.

The seller could potentially have gained more revenue by setting different prices for earlier units.

A single price for all consumers results in selling earlier units below their marginal benefit value.

Transcripts

In the last video, we saw how you can actually

view a demand curve as actually a marginal benefit curve.

That for any given the quantity of the good you're

selling, that that point on the curve

is actually showing the marginal benefit

for that incremental unit.

So this is a marginal benefit for that first unit.

This is the marginal benefit for that second unit.

And there's multiple ways that you could view this,

assuming that we're talking about this new car here.

Maybe if you're going to only sell one unit,

someone really wants it really bad, the benefit for them,

the marginal benefit for that first unit for them,

is going to be $60,000.

Now, let's say if you want to sell two units,

that second unit might be bought by that same person.

And they might say, well, I already have one car.

The benefit of getting that second one's only $50,000.

That's the point at which I am neutral.

That's the point at which I'm right on the fence of willing

to buy that car.

Or it might be another person, another person who's just not

as enamored as the first person, who says, OK,

for $50,000 I do like that car.

And then for the third, the third person there, once again,

they're not as enamored as the first two,

they would be willing to buy it for $40,000.

And what we saw is at some point you

could say, look, let's say that we decide that the price ends

up being-- for whatever reason-- $30,000.

And so when the price is $30,000--

and this is kind of viewing it in the traditional notion of,

at a price, what quantity were you selling it.

But when you think about that reality, what's actually

happening is that this fourth person is right on the fence.

Their marginal benefit is exactly $30,000.

So in their mind, they're saying,

I am giving away $30,000.

And in exchange for that I'm getting something

that is worth $30,000.

So it's kind of like, hey, will you

be willing to trade this dollar for a dollar?

Well, you probably would be kind of on the fence about that.

You're very close to going either way.

You feel like it's a good deal if you could get it

for maybe a penny less.

It's a bad deal if you're getting it for a penny more.

So right on the fence, but you're

going to just barely get this fourth person

to transact at this price.

But what we hinted at is if you do

have one price for everybody-- in the future we'll

talk about not having one price for everybody--

but if you did have one price for everyone,

these first units were kind of sold

below where they could have been sold.

They were sold below their marginal benefit.

So remember, we're viewing this same demand

curve we're now viewing as a marginal benefit curve.

So this first unit right over here,

it could have been sold at $60,000.

But now, we're selling it for $30,000.

So this right over here, this was $30,000.

I'll just write 30 for $30,000.

The marginal benefit is $30,000 higher than the actual price.

The marginal benefit of that unit,

the benefit that the market got out of it

is $30,000 higher than the price.

The marginal benefit for the second unit

is $20,000 higher than the price at which the product is

being sold.

The marginal benefit for this third unit,

assuming this is $40,000, is $10,000.

Or another way to think about it is,

the consumer surplus for this first unit was $30,000.

The consumer's got $30,000 more in benefit, marginal benefit

for them and value for themselves,

than they had to pay for it.

Here, the consumer surplus was $20,000.

The consumer got $20,000 more in value

than that second consumer was willing to pay for it.

And here is $10,000.

And then this fourth consumer is neutral.

The marginal benefit is what they paid for it.

And so when you think about this,

you can say, well, what's the total consumer surplus here?

Let me write this down.

What is the total consumer surplus?

And another way of thinking about it

is, what is the total excess of marginal benefit

above and beyond the price paid?

So how much surplus marginal benefit

did they get, if you take out the price paid?

And over here, the total consumer surplus

is going to be the $30,000 for that first unit,

plus the $20,000 for that second unit,

plus the $10,000 for that third unit.

And so the total consumer surplus

in this scenario when we sold four units at $30,000

is-- And we're assuming we're selling cars here.

So we can't sell parts of cars here.

We can't sell 1.1 cars.

I guess if we're talking about averages, maybe we could.

But let's just say we're selling just whole numbers of cars

here.

The total consumer surplus in this situation was 30 plus 20

plus 10, which is $60,000.

Everything's in thousands.

So this is $60,000.

So in this scenario, in that week,

the consumers would get $60,000 more in benefit for them,

in perceived benefit for them, than what they actually

had to pay for it.

And if you think about it, it's a little

unideal for the seller, because they were selling something

at a lower price than maybe what they could have gotten

from at least these first few consumers here.

And that was because they, just really based on the model

that we have here, they just had to set one price.