HowMuch Benefit Will Chai TeaDrinkers Receive?How much benefit do theHighestPriceConsumerpotential tea consumersWillingto PayS6Theresaderive from this market?Price(dollars5Tompercup)Theresa4TerriThat depends on the3$6TimTompriceand theirmarginal5benefit, the additionalTerribenefit to a consumer4Timfrom consuming one3more unit of a good orservice.MarketdemandcurveforchaiteaIf the price is low, many of01234Quantitythe consumers benefit.(cupsperday)Figure 4.1Deriving the demandIf the price is high, few (ifcurve for chai teaany)oftheconsumersbenefit.62015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 6 How Much Benefit Will Chai Tea Drinkers Receive? How much benefit do the potential tea consumers derive from this market? That depends on the price and their marginal benefit, the additional benefit to a consumer from consuming one more unit of a good or service. If the price is low, many of the consumers benefit. If the price is high, few (if any) of the consumers benefit. Deriving the demand curve for chai tea Figure 4.1
Consumer Surplusat a Priceof s3.50If the price of tea is $3.50 percup, Theresa, Tom, and TerriPrice(dollarsTheresa'spercup)consumersurpluswill buy a cup.$65Theresa was willing to payMarketprice$6.00; a cup of chai tea is"worth" $6.00 to her. She gotMarketdemandcurve for chaiteait for $3.50, so she derives anet benefit of023Quantity(cupsperday)$6.00 - $3.50 = $2.50(a)Consumersurpluswithamarketpriceofs3.50Area A represents this netbenefit, and is known asTheresa's consumer surplusFigure 4.2aMeasuring consumersurplusin the chai tea market.2015PearsonEducation,lnc
© 2015 Pearson Education, Inc. 7 Consumer Surplus at a Price of $3.50 If the price of tea is $3.50 per cup, Theresa, Tom, and Terri will buy a cup. Theresa was willing to pay $6.00; a cup of chai tea is “worth” $6.00 to her. She got it for $3.50, so she derives a net benefit of $6.00 – $3.50 = $2.50. Area A represents this net benefit, and is known as Theresa’s consumer surplus in the chai tea market. Measuring consumer surplus Figure 4.2a
Consumer Surplus at a Priceof s3.50-continuedTom and Terri also obtainconsumersurplus,equaltoPrice(dollarsTheresa'spercup)$1.50 (area B) and $0.50consumersurplusTom's$6(area C).consumersurplusTerri's5consumersurplusABMarketprice4CThe sum of the areas ofrectangles A, B, and C isMarketdemandcurve for chai teacalledtheconsumersurplusinthe chai tea market.O23Quantity(cups per day)(a)Consumersurpluswithamarketpriceofs3.50Thisareacanbe describedastheareabelowthedemandcurve, above the price thatFigure 4.2aconsumerspay.Measuring consumersurplus@2015PearsonEducation,Inc8
© 2015 Pearson Education, Inc. 8 Consumer Surplus at a Price of $3.50—continued Tom and Terri also obtain consumer surplus, equal to $1.50 (area B) and $0.50 (area C). The sum of the areas of rectangles A, B, and C is called the consumer surplus in the chai tea market. This area can be described as the area below the demand curve, above the price that consumers pay. Measuring consumer surplus Figure 4.2a
ConsumerSurplus IfPrice Fallsto 3.00If the price falls to $3.00.Theresa, Tom, and Terri eachPrice(dollarsTheresa'spercup)gain an additional $0.50 ofconsumersurplusTom'sS6consumersurplusconsumersurplus.Terri's5consumer surplusBTim's consumerCTim is indifferent betweensurplus (zero)Marketpricebuying the cup or not; his well-Marketdemandbeing is the same either way.curve for chaitea23Quantity(cups per day)(b) Consumer surplus with a market price of $3.00The overall consumer surplusremainstheareabelowthedemand curve, above the(new) price.Figure 4.2bMeasuring consumersurplus@2015PearsonEducation,Inc.9
© 2015 Pearson Education, Inc. 9 Consumer Surplus If Price Falls to $3.00 If the price falls to $3.00, Theresa, Tom, and Terri each gain an additional $0.50 of consumer surplus. Tim is indifferent between buying the cup or not; his wellbeing is the same either way. The overall consumer surplus remains the area below the demand curve, above the (new) price. Measuring consumer surplus Figure 4.2b
Total Consumer Surplus in the Market for Chai TeaThe market for chai tea islargerthan justourfourPrice(dollarsconsumers.per cup)Total consumer surplus inthemarketforchaiteaWithmany consumers,themarketdemandcurvelooks"normal": a straight line.$2.00Consumersurplus inthisDemandmarket is defined in just the015,000Quantity(cupspersame way: the area below theday)demandcurve,above price.Thegraphshowsconsumersurplus if price is $2.00Figure 4.3Total consumersurplus inthe marketforchaitea10@2015PearsonEducation,Inc
© 2015 Pearson Education, Inc. 10 Total Consumer Surplus in the Market for Chai Tea The market for chai tea is larger than just our four consumers. With many consumers, the market demand curve looks “normal”: a straight line. Consumer surplus in this market is defined in just the same way: the area below the demand curve, above price. The graph shows consumer surplus if price is $2.00. Total consumer surplus in the market for chai tea Figure 4.3