(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 158

CHAPTER 4 • Individual and Market Demand 133

When deciding how many tickets to buy, our student might reason as follows:
The first ticket costs $14 but is worth $20. This $20 valuation is obtained by using the
demand curve to find the maximum amount that she will pay for each additional ticket
($20 being the maximum that she will pay for the first ticket). The first ticket is worth
purchasing because it generates $6 of surplus value above and beyond its cost. The
second ticket is also worth buying because it generates a surplus of $5 ($19 - $14).
The third ticket generates a surplus of $4. The fourth, however, generates a surplus
of only $3, the fifth a surplus of $2, and the sixth a surplus of just $1. Our student is
indifferent about purchasing the seventh ticket (which generates zero surplus) and
prefers not to buy any more than that because the value of each additional ticket is
less than its cost. In Figure 4.14, consumer surplus is found by adding the excess values
or surpluses for all units purchased. In this case, then, consumer surplus equals
$6 + $5 + $4 + $3 + $2 + $1 = $21
To calculate the aggregate consumer surplus in a market, we simply find the area below the market demand curve and above the price line.
For our rock concert example, this principle is illustrated in Figure 4.15.
Now, because the number of tickets sold is measured in thousands and
individuals’ demand curves differ, the market demand curve appears
as a straight line. Note that the actual expenditure on tickets is 6500 ϫ
$14 ϭ $91,000. Consumer surplus, shown as the yellow-shaded triangle, is
1/2 * ($20 - $14) * 6500 = $19,500
This amount is the total benefit to consumers, less what they paid for the tickets.
Of course, market demand curves are not always straight lines. Nonetheless,
we can always measure consumer surplus by finding the area below the demand
curve and above the price line.

20
Price
(dollars per 19
ticket)

F IGURE 4.15

18

CONSUMER SURPLUS GENERALIZED
17
16

Consumer
Surplus

15
Market Price
14
13
Actual Expenditure

0

1

2
3
4
5
6
7
Rock concert tickets (thousands)

Demand Curve

For the market as a whole, consumer surplus
is measured by the area under the demand
curve and above the line representing the purchase price of the good. Here, the consumer
surplus is given by the yellow-shaded triangle
and is equal to 1/2 ϫ ($20 Ϫ $14) ϫ 6500 ϭ
$19,500.