Chapter 4, Problem aWYWL

To determine

To explain:

What is consumer surplus is and its relationship to the demand curve?

Concept Introduction:

Consumer Surplus:

The consumer surplus is the differences between the amounts that people are willing to pay for good or service and the amount they actually pay for the commodity. The consumer surplus is calculated by deducting the willingness to pay for the commodity and actual payment for the commodity.

Demand curve:

Demand curve is the graphical representation of the demand schedule.

Demand:

The demand is defined as the ability to pay for a goods and services.

Explanation of Solution

In the above graph the coloured section shows the consumer surplus, the consumer surplus is the differences between the amounts that people are willing to pay for good or service and the amount they actually pay for the commodity. The consumer surplus lies below the demand curve and above the price line. An increase in the price of the commodity will reduce the consumer surplus and a decrease in the price of commodity increase the consumer surplus. The relationship between demand curve and consumer surplus is that the demand curve represents the willingness to pay for the commodity. For instance when there is a price increase a few people want to buy the goods than before so the willingness to pay for the commodity has decreased.