Consumer Surplus

• Demand: Amount that will be purchased as a function of price p.
• (Inverse) Demand: Price consumers will pay for next unit as function of number of units consumed, q.

Willingness to Pay

Interpret Demand as Willingness to pay for next unit

Area under demand is total willingness to pay.

Exact money measures—Equivalent and Compensating variation

Could make consumer better off by lowering prices from p0 to p1. An equivalent way to make better off would be to give money.

The equivalent variation to a price decrease from p0 to p1 is the amount of money that makes the consumer just as well off as if prices had decreased from p0 to p1.

The compensating variation to a price decrease from p0 to p1 (not pictured) is the amount of money that, when subtracted from the consumers income, leaves the consumer just as well off at price p1 as he would have been with his original income at p0.

Compensating—price decrease better off, remove income back to orginal level of utility

Willig’s theorem: equivalent and compensating variation bound consumer surplus.

• Income and Substitution effects (a subject for another course)
• same picture as above

Travel Cost: Should Mineral King be a Ski Area?

(Krutilla and Fisher. Economics of Natural Environments. Johns Hopkins University Press. Baltimore. 1975. pp:189-218.

• miles to measure price
• income by county of origin
• number of skiiers by ski area
• D(y, pThisArea, pOtherAreas, snow conditions?)
• Would a new area make sense
• cost of new area (25 million dollars, present value at 9%)
• cost of road (25 million dollars)
• willingness to pay for new area (8.2 to 26.7 million dollars present value)