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1、Chapter 14 Consumers Surplus Monetary Measures of Gains-to-Trade You can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market. Q: What is the most you would pay to enter the market? Monetary Measures of Gains-to-Trade A: You would pay up to the dollar value of the gai
2、ns-to-trade you would enjoy once in the market. How can such gains-to-trade be measured? Monetary Measures of Gains-to-Trade Three such measures are: Consumers Surplus Equivalent Variation, and Compensating Variation. Only in one special circumstance do these three measures coincide. $ Equivalent Ut
3、ility Gains Suppose gasoline can be bought only in lumps of one gallon. Use r1 to denote the most a single consumer would pay for a 1st gallon - call this her reservation price for the 1st gallon. r1 is the dollar equivalent of the marginal utility of the 1st gallon. $ Equivalent Utility Gains Now t
4、hat she has one gallon, use r2 to denote the most she would pay for a 2nd gallon - this is her reservation price for the 2nd gallon. r2 is the dollar equivalent of the marginal utility of the 2nd gallon. $ Equivalent Utility Gains Generally, if she already has n-1 gallons of gasoline then rn denotes
5、 the most she will pay for an nth gallon. rn is the dollar equivalent of the marginal utility of the nth gallon. $ Equivalent Utility Gains r1 + + rn will therefore be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of $0. So r1 + + rn - pGn will
6、be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of $pG each. $ Equivalent Utility Gains A plot of r1, r2, , rn, against n is a reservation-price curve. This is not quite the same as the consumers demand curve for gasoline. $ Equivalent Utility
7、Gains Reservation Price Curve for Gasoline0246810Gasoline (gallons)($) Res. Values1 2 3 4 5 6 r1 r2 r3 r4 r5 r6 $ Equivalent Utility Gains What is the monetary value of our consumers gain-to-trading in the gasoline market at a price of $pG? $ Equivalent Utility Gains The dollar equivalent net utilit
8、y gain for the 1st gallon is $(r1 - pG) and is $(r2 - pG) for the 2nd gallon, and so on, so the dollar value of the gain-to- trade is $(r1 - pG) + $(r2 - pG) + for as long as rn - pG 0. $ Equivalent Utility Gains Reservation Price Curve for Gasoline0246810Gasoline (gallons)($) Res. Values1 2 3 4 5 6
9、 r1 r2 r3 r4 r5 r6 pG $ value of net utility gains-to-trade $ Equivalent Utility Gains Now suppose that gasoline is sold in half- gallon units. r1, r2, , rn, denote the consumers reservation prices for successive half-gallons of gasoline. Our consumers new reservation price curve is $ Equivalent Uti
10、lity Gains Reservation Price Curve for Gasoline0246810Gasoline (half gallons)($) Res. Values1 2 3 4 5 6 r1 r3 r5 r7 r9 r11 7 8 9 10 11 pG $ value of net utility gains-to-trade $ Equivalent Utility Gains And if gasoline is available in one-quarter gallon units . $ Equivalent Utility Gains Reservation
11、 Price Curve for Gasoline0246810Gasoline (one-quarter gallons)($) Res. ValuespG $ value of net utility gains-to-trade $ Equivalent Utility Gains Finally, if gasoline can be purchased in any quantity then . $ Equivalent Utility Gains Gasoline ($) Res. Prices pG Reservation Price Curve for Gasoline $
12、value of net utility gains-to-trade $ Equivalent Utility Gains Unfortunately, estimating a consumers reservation-price curve is difficult, so, as an approximation, the reservation-price curve is replaced with the consumers ordinary demand curve. Consumers Surplus A consumers reservation-price curve
13、is not quite the same as her ordinary demand curve. Why not? A reservation-price curve describes sequentially the values of successive single units of a commodity. An ordinary demand curve describes the most that would be paid for q units of a commodity purchased simultaneously. Consumers Surplus Ap
14、proximating the net utility gain area under the reservation-price curve by the corresponding area under the ordinary demand curve gives the Consumers Surplus measure of net utility gain. Consumers Surplus Gasoline Reservation price curve for gasoline Ordinary demand curve for gasoline pG ($) Consume
15、rs Surplus Gasoline Reservation price curve for gasoline Ordinary demand curve for gasoline pG $ value of net utility gains-to-trade ($) Consumers Surplus Gasoline Reservation price curve for gasoline Ordinary demand curve for gasoline pG $ value of net utility gains-to-trade Consumers Surplus ($) Consumers Surplus Gasoline Reservation price curve for gasoline Ordinary demand curve for gasoline pG $ value of net utility gains-to-trade Consumers Surplus ($) Consumers Surplus The difference between the consumers reservation-price and ordinary demand curves is due to income effects.
