How A LOWER PRICE RAISES CONSUMER SURPLUS
Because buyers always want to pay less for the goods they buy, a lower price makes buyers of a good better off. But how much does buyers’ well-being rise in response to a lower price? We can use the concept of consumer surplus to answer this question precisely. Figure 3 shows a typical demand curve. You may notice that this curve gradually slopes downward instead of taking discrete steps as in the previous two figures. In a market with many buyers, the resulting steps from each buyer dropping out are so small that they form, in essence, a smooth curve. Although this curve has a different shape, the ideas we have just developed still apply Consumer surplus is the area above the price and below the demand curve. In panel (a), consumer surplus at a price of PI is the area of triangle ABC Now suppose that the falls from PI to P2. as shown in panel (b). The ‘consumer surplus now equal Is area ADF. The increase ~ consumer surplus attributable to the lower price is the area BCFD. This increase in consumer usurp us is composed of two parts. First, those buyers who were already
buying QI of the good at the higher-price PI are better off because they now pay less. The increase in consumer surplus of existing buyers is the reduction in the amount they pay; it equals the area of the rectangle BCED. Second, some new buyers enter the market because they are now willing to buy the good at the lower price. As a result, the quantity demanded ~ the market increases from QI to Q2. The consumer surplus these newcomers receive is the area of the triangle CEF.
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