Ten Principles of Economics - Part 15. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 7 CONSUMERS PRODUCERS AND THE EFFICIENCY OF MARKETS 147 Now suppose that the price falls from P1 to P2 as shown in panel b . The consumer surplus now equals area ADF. The increase in consumer surplus attributable to the lower price is the area BCFD. This increase in consumer surplus is composed of two parts. First those buyers who were already buying Qj of the good at the higher price P1 are better off because they now pay less. The increase in consumer surplus of existing buyers is the reduction in the amount they pay it equals the area of the rectangle BCED. Second some new buyers enter the market because they are now willing to buy the good at the lower price. As a result the quantity demanded in the market increases from Qx to Q2. The consumer surplus these newcomers receive is the area of the triangle CEF. WHAT DOES CONSUMER SURPLUS MEASURE Our goal in developing the concept of consumer surplus is to make normative judgments about the desirability of market outcomes. Now that you have seen what consumer surplus is let s consider whether it is a good measure of economic well-being. Imagine that you are a policymaker trying to design a good economic system. Would you care about the amount of consumer surplus Consumer surplus the amount that buyers are willing to pay for a good minus the amount they actually pay for it measures the benefit that buyers receive from a good as the buyers themselves perceive it. Thus consumer surplus is a good measure of economic well-being if policymakers want to respect the preferences of buyers. In some circumstances policymakers might choose not to care about consumer surplus because they do not respect the preferences that drive buyer behavior. For example drug addicts are willing to pay a high price for heroin. Yet we would not say that addicts get a large benefit from being able to buy heroin at a low price even though addicts might say they do . From the standpoint of society willingness to pay in this instance is not
