Int. MicroDemand and Welfare

Consumer Surplus as an Integral

Consumer surplus is the area under the demand curve and above the price, an integral over quantity.

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Consumer and Producer Surplus measured consumer surplus as a triangle. That works for straight-line demand. For any demand curve the area is an integral, which the Fundamental Theorem of Calculus lets us compute exactly.

Key idea

With inverse demand $P(q)$, price $p$ and quantity bought $Q$ (where $P(Q) = p$): $$CS = \int_0^Q \big(P(q) - p\big)\,dq = \int_p^{P_{\max}} Q(P)\,dP.$$ When the price falls from $p_0$ to $p_1$, consumer surplus rises by $\Delta CS = \int_{p_1}^{p_0} Q(P)\,dP$.

Why it works

The height of the demand curve at quantity $q$ is the most someone would pay for the $q$-th unit. Buying it at price $p$ leaves a gain of $P(q) - p$. A thin slice of units of width $dq$ gives a gain of $(P(q) - p)\,dq$, and adding all the slices from the first unit to the last unit bought is the integral. The second formula adds the same area in horizontal slices: at each price level $P$ above $p$, the strip has length $Q(P)$.
$P(q) - p$ for demand $P = 20 - 2q$ and price \$8. The area from 0 to $Q = 6$ is consumer surplus, \$36. Past $q = 6$ the integrand is negative: units buyers value at less than the price, which they don't buy.

Worked example: Linear demand

$P(q) = 20 - 2q$ and $p = 8$.
  1. $Q$: $20 - 2q = 8$ gives $Q = 6$.
  2. $$CS = \int_0^6 (12 - 2q)\,dq = \left[12q - q^2\right]_0^6 = 72 - 36 = 36$$
  3. Check: the triangle $\tfrac{1}{2}\cdot 6\cdot 12 = 36$.

Answer: \$36.

Worked example: A curved demand

$P(q) = \dfrac{12}{\sqrt{q}}$ and $p = 3$.
  1. $Q$: $12/\sqrt{Q} = 3$, so $\sqrt{Q} = 4$ and $Q = 16$.
  2. $$CS = \int_0^{16}\left(12q^{-1/2} - 3\right)dq = \left[24\sqrt{q} - 3q\right]_0^{16} = 96 - 48 = 48$$
  3. The demand curve shoots up near $q = 0$, but the area is still finite.

Answer: \$48.

Worked example: Gain from a price cut

Demand $Q = 40 - 2P$. The price falls from \$12 to \$8.
  1. $\Delta CS = \int_8^{12}(40 - 2P)\,dP = \left[40P - P^2\right]_8^{12}$.
  2. $= (480 - 144) - (320 - 64) = 336 - 256 = 80$.
  3. Check: a trapezoid between quantities 16 and 24, height 4: $\tfrac{1}{2}(16 + 24)(4) = 80$.

Answer: \$80.

Market consumer surplus is the same integral under the market demand curve, which adds up every buyer's gain. That makes it the standard way to put a dollar value on what buyers gain or lose from a price change, a tax or a new product. It is exact when income effects are small; Compensating and Equivalent Variation shows what changes when they are not.

Common mistake

Integrating the demand curve from 0 to $Q$ without subtracting the price. That gives total willingness to pay: \$84 for the first example, not \$36. Buyers keep only the part above the price; the rectangle $p \times Q = 8 \times 6 = 48$ is what they pay. Check: consumer surplus must be smaller than total willingness to pay by exactly the amount spent.

Practice

Pass with 3 right answers, the last 2 in a row. Each right answer earns 2 XP.

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Sources and further reading

  • OpenStax Principles of Microeconomics 3e, ch. 3.4 Price Ceilings and Price Floors (consumer surplus)
  • OpenStax Calculus Volume 1, 5.3 The Fundamental Theorem of Calculus
  • MIT OpenCourseWare 14.04 Intermediate Microeconomic Theory (course scope and lecture topics)
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