6.2 Value,Price, and Consumer Surplus

qLand Mine: The consumer surplus, producer surplus, and deadweight loss are allgenerally triangular in shape. Indeed, if you draw only linear demand andsupply curves and do not make either curve vertical or horizontal, thesesurpluses and any deadweight loss are triangles. So, it is a good idea toremind your students of the formula for calculating the area of a triangle.Make sure to do several examples of the calculation for both consumer andproducer surplus. Remind them that this area represents a dollar value. Thisreminder is especially useful when you quantify the deadweight losses createdby monopolies, quotas, subsidies, etc. Many students just see the loss tosociety as a loss of jobs or less output, but you can create more intuition byputting the loss in dollar terms. It always helps to use colored chalk,overheads, or PowerPoint slides when dividing up the demand-supply graph intoproducer surplus, consumer surplus, and deadweight loss. By consistently usingcolored chalk or the other techniques, you can refer to area by color (“Thegreen area shows consumer surplus and the red area shows the deadweight loss.”)The size of the areas are much more apparent. Additionally, you don’t need togo back to the screen or board to try to outline the area. Students easilyassociate green with growth (“go”) and red with deficit (as in “in the red.”)

Demand and MarginalBenefit

• The value of     one more unit of a good or service is its marginal benefit. Marginal     benefit is measured as the maximum price that people are willing to pay for another unit of a     good or service.

• The willingness     to pay for a good or service determines the demand for it. So, as     illustrated in the figure, a demand     curve for a good or service is also its marginal benefit curve.

·        Thedemand curve in the figure shows that the maximum price a person is willing topay for the 6,000,000th gallon of milk per month is $3, so $3 is the value andmarginal benefit of this gallon.

• Consumer surplus is the marginal benefit     from a good or service minus the price paid for it, summed over the units     purchased. The figure illustrates the consumer surplus as the shaded triangle     when the price is $3 per gallon.