Raymond Hayden Economics

Using The Demand Curve To Measure Consumer Surplus

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Consumer surplus is closely related to the demand curve for a product. To see how they are related, let's continue our example and consider the demand curve for this rare Elvis Presley album.

We begin by using the willingness to pay of the four possible buyers to find the demand schedule for the album. Table 7-2 shows the demand schedule that corresponds to Table 7-1. If the price is above $100, the quantity demanded in the market is 0, because no buyer is willing to pay that much. If the price is between $80 and $100, the quantity demanded is 1, because only John is willing to pay such a high price. If the price is between $70 and $80, the quantity demanded is 2, because both John and Paul are willing to pay the price. We can continue this analysis for other prices as well. In this way, the demand schedule is derived from the willingness to pay of the four possible buyers.

Figure 7-1 graphs the demand curve that corresponds to this demand schedule. Note the relationship between the height of the demand curve and the buyers' willingness to pay. At any quantity, the price given by the demand curve shows

Table 7-2

The Demand Schedule for the Buyers in Table 7-1

Price

More than $100 $80 to $100 $70 to $80 $50 to $70 $50 or less

Buyers

Quantity Demanded

None John

John, Paul

John, Paul, George

John, Paul, George, Ringo

Figure 7-1

The Demand Curve. This figure graphs the demand curve from the demand schedule in Table 7-2. Note that the height of the demand curve reflects buyers' willingness to pay.

0 1 2 3 4 Quantity of

Albums

0 1 2 3 4 Quantity of

Albums the willingness to pay of the marginal buyer, the buyer who would leave the market first if the price were any higher. At a quantity of 4 albums, for instance, the demand curve has a height of $50, the price that Ringo (the marginal buyer) is willing to pay for an album. At a quantity of 3 albums, the demand curve has a height of $70, the price that George (who is now the marginal buyer) is willing to pay.

Because the demand curve reflects buyers' willingness to pay, we can also use it to measure consumer surplus. Figure 7-2 uses the demand curve to compute consumer surplus in our example. In panel (a), the price is $80 (or slightly above), and the quantity demanded is 1. Note that the area above the price and below the demand curve equals $20. This amount is exactly the consumer surplus we computed earlier when only 1 album is sold.

Panel (b) of Figure 7-2 shows consumer surplus when the price is $70 (or slightly above). In this case, the area above the price and below the demand curve

Price of Album

$100

0 0