Total consumer surplus as area | Microeconomics | Khan Academy

Summary

The script explains the concept of consumer surplus using an orange stand example. It highlights how consumer surplus is the difference between what consumers are willing to pay and what they actually pay. The marginal benefit curve, or demand curve, reflects this. For each pound of oranges, if the willingness to pay is higher than the set price, the surplus is the area between the demand curve and the price. In this case, with a price of $2 and 300 pounds sold, the total consumer surplus is calculated as the area of a triangle, yielding $300.

Takeaways

• 🍊 The demand curve represents the willingness to pay for oranges, with each additional pound having a slightly lower value.
• 💲 Setting a price of $2 allows the sale of 300 oranges, which is a strategic decision to maximize consumer surplus.
• 📊 Consumer surplus is calculated as the difference between what consumers are willing to pay and what they actually pay.
• 🔍 The consumer surplus for the 100th pound is $1.30, as they paid $2 but were willing to pay $3.30.
• 📐 The total consumer surplus is the area between the demand curve and the price line at $2.
• 📈 For a linear demand curve, the total consumer surplus can be calculated as the area of a triangle.
• 📖 Calculating consumer surplus involves integrating under the demand curve, which can be approximated with smaller rectangles for non-linear curves.
• 📉 The base of the triangle representing total consumer surplus is the quantity sold (300 pounds), and the height is the difference between the maximum willingness to pay and the price ($1.00).
• 🧮 The formula for the area of a triangle is used to calculate the total consumer surplus: 1/2 * base * height.
• 💵 The total consumer surplus in this scenario is $300, which is the area between the demand curve and the price line at $2.

Q & A

What is the concept of consumer surplus explained in the script?

Consumer surplus is the difference between how much a consumer is willing to pay for a good and how much they actually pay for it. It represents the extra benefit or value that consumers receive beyond what they paid.

How is the willingness to pay represented in the script?

The willingness to pay is represented by the demand curve or marginal benefit curve, where the price a consumer is willing to pay for each additional pound of oranges decreases as more pounds are considered.

What is the significance of the 100th pound of oranges in the script?

The 100th pound of oranges is used as an example to illustrate how consumer surplus is calculated for an individual pound. The consumer paid $2 but was willing to pay $3.30, resulting in a consumer surplus of $1.30 for that pound.

Why did the price for oranges get set at $2 in the script?

The price was set at $2 as an example to demonstrate how consumer surplus is calculated when the market price is lower than the willingness to pay for some consumers.

How many oranges were sold at the price of $2 according to the script?

At the price of $2, 300 oranges were sold.

What is the formula for calculating the area of a triangle as it relates to consumer surplus in the script?

The formula used to calculate the area of a triangle, and thus the total consumer surplus, is 1/2 times the base times the height. In the context of the script, the base is the quantity of oranges sold (300 pounds), and the height is the difference between the willingness to pay and the price ($3.30 - $2 = $1.30).

How does calculus play a role in calculating consumer surplus in the script?

Calculus is mentioned as a method to improve the approximation of the consumer surplus by using thinner and thinner rectangles to approximate the area under the demand curve, especially when the demand curve is non-linear.

What is the total consumer surplus calculated in the script?

The total consumer surplus is calculated to be $300, which is the area of the triangle formed by the demand curve and the price line at $2.

Why is it important to understand consumer surplus from the perspective of each pound of oranges in the script?

Understanding consumer surplus per pound helps to visualize the additional value each consumer receives relative to what they paid, which when summed up gives the total consumer surplus.

How does the script suggest improving the estimation of consumer surplus?

The script suggests using smaller rectangles to approximate the area under the demand curve, which would provide a better estimation of consumer surplus, especially for non-linear demand curves.

What is the practical implication of understanding consumer surplus for a business like an orange stand?

Understanding consumer surplus can help a business like an orange stand to set prices that maximize consumer benefit while also ensuring profitability, as it shows the value consumers receive beyond what they pay.