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M02.L02 — Willingness to Pay and Consumer Surplus

Module: Module 02 — Demand and Willingness to Pay
Lesson: L02 of 05
Duration: ~30 minutes
Level: Introductory
Provenance: Principles of Microeconomics (Curtis and Irvine) | MIT OCW 14.01

Learning Objective

Calculate consumer surplus using willingness to pay and demand curves.

Willingness to Pay (WTP)

WTP is the maximum price a consumer would pay for a good. In Australia, consider toll roads: drivers value time savings differently, creating a range of WTP (e.g., \(5–\)20 for a Sydney tunnel).

Consumer Surplus: The difference between WTP and the actual price paid. For a $10 toll, a driver with $15 WTP gains $5 surplus.

Worked Example

Sydney Harbour Bridge Toll

  1. Drivers' WTP: $8, $10, $12, $15.
  2. Toll price: $10.
  3. Surplus: $0, $0, $2, $5 (total surplus = $7).
  4. Graphically, this is the area above $10 and below the demand curve.

Common Misconception

"Consumer surplus is the same as profit."

Profit is revenue minus costs (producer-side), while surplus measures consumer benefit.

Key Takeaways

  • WTP varies by individual and context.
  • Consumer surplus quantifies net consumer benefit.
  • Surplus is area under demand curve and above price.
  • Policies (e.g., subsidies) can alter surplus.

Exam-Style Calculation Practice

Key technique: MB curve = demand curve = WTP for each unit

The marginal benefit (MB) curve shows the maximum price a consumer will pay for each successive unit. To find WTP for unit n, substitute q = n into the MB equation.

Example 1: MB curve is MB = 150 − 2q. - WTP for unit 1: MB = 150 − 2(1) = \(148** - WTP for unit 10: MB = 150 − 2(10) = **\)130 - At what quantity does WTP = $0? Set 150 − 2q = 0 → q = 75

Example 2: Market price = \(90, MB = 150 − 2q. - Quantity purchased: set MB = P → 150 − 2q = 90 → **q* = 30** - Consumer surplus = ½ × base × height = ½ × 30 × (150 − 90) = **\)900**

Practice

  1. A consumer's MB = 120 − 3q. What is the maximum price they will pay for unit 15? At what quantity does demand reach zero?
  2. Calculate surplus if WTPs are $20, $18, $15, $12 and price is $16.
  3. If MB = 80 − q and price = $40, find (a) quantity purchased and (b) total consumer surplus.

Further Resources

Provenance: Principles of Microeconomics (Curtis and Irvine) | MIT OCW 14.01