Welfare Economics¶
Measure of well-being
Normative (subjective) analysis
Purpose¶
Problem¶
- Unknown utility function
- Unknown satisfaction
Solution¶
- Compensating variation
- How much would one be willing to pay to increase their satisfaction
- How much would one be willing to pay not to be worse off
Surplus¶
| Consumer Surplus | Supplier Surplus | |
|---|---|---|
| Meaning | Benefit that a consumer obtains beyond what they paid | Benefit that a supplier obtains beyond what they sold |
| Formula | Price as per Demand Function - Equilibrium Price = Willingness to Pay - Actual Payment | Equilibrium Price - Price as per Supply Function = Actual Sale - Willingness to Sell = TR - Cost = Basically the profit |
| Graphical | \(\begin{aligned} &= \text{area below demand curve and above equilibrium price line} \\ &= \int \limits_0^{Q} Q_d - \int \limits_0^{P} P_d \end{aligned}\) | \(\begin{aligned} &= \text{area above supply curve and below price line} \\ \\ &= \int \limits_0^{Q} Q_s - \int \limits_0^{P} P_s \end{aligned}\) |
| Relationship with elasticity | \(\text{CS} \propto \dfrac{1}{ \vert e_d \vert}\) | \(\text{PS} \propto \vert e_s \vert\) |
| Relationship with equilibrium price | \(\text{CS} \propto \dfrac 1 {P_{eq}}\) Most affected: People who are inelastic Less affected: People who are elastic | \(\text{PS} \propto P_{eq}\) |
| Individual |  |  |
| Market |  |  |
Total Benefit¶
Sum of producer and consumer surplus