Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
7th Edition
ISBN: 9781285165912
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
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Chapter 7, Problem 1QR
To determine

How willingness to pay, consumer surplus, and demand curve are related.

Expert Solution & Answer
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Explanation of Solution

The consumer surplus is the difference between the maximum willing to pay price by the consumer and the actual paying price of the consumer. The maximum willing to pay price is the price that the consumer gives to the commodity. When the consumer values the good most, he will be ready to pay the highest willing to pay price and vice versa. Thus, the willingness to pay, the consumer surplus, and the demand curve are closely related with each other.

The peak point of the demand curve is the maximum willing to pay price by the consumer and thus, the height of the demand curve represents the maximum willingness to pay price of the consumer for the commodity. The area below this price and above the actual paying price represents the consumer surplus of the economy, which is equal to the price that the consumer is willing to pay minus the price actually paid. In this way, the consumer surplus, willingness to pay, and the demand curve are closely related.

Economics Concept Introduction

Concept introduction:

Consumer surplus: It is the difference between the highest willing to pay price of the consumer and the actual price that the consumer pays.

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