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Consumer surplus is closely related yo the demand curve for a product. To see how they are related let’s continue our example and consider the demand curve for this rare Elvis Presley album. We begin by using the willingness to pay of the four possible buyers to find the demand schedule for the album. The table in the demand schedule that corresponds to table. If the price is above $100 the quantity demanded in the market is because no buyer is willing to pay that much. If the price between and the quantity demanded is because only John is willing to pay such a high price. If the price is between and the quantity demanded is because   both john and Paul are willing to pay the price. We can continue this analysis for other prices as well. In this way the demand schedule is derived from the willingness to pay of the four possible buyers. The demand curve that corresponds of this demand schedule. Note the relationship between the height of the demand curve and t...

Imagine that you own a mint-condition recording of Elvis Presley’s first album. Because you are not an Elvis Presley fan you decide to sell it. One way to do so is to hold an auction. Four Elvis fans show up for your auction: john, George and Ringo. Each of them would like to own the album but there is a limit to the amount that each is willing to pay for it. Table the maximum pric that each of the four possible buyers would pay. Each buyer’s maximum is called his willingness to pay and it measures how much that buyer values the good. Each buyer would be eager to buy the album at a price less than his willingness to pay and he would refuse to buy the album at a price get rater than his willingness to pay. At a price equal to his willingness to pay the buyer would be indifferent about buying the good. If the price is exactly the same as the value he places on the album he would be equally happy buying it or keeping his money. To sell your album you begin the bidd...

When consumers go to grocery stores to buy their turkeys for   Thanksgiving dinner they may be disappointed that the price of turkey as high as it is. At the same time when farmers bring to market the turkeys they have raised they wish the price of turkey were even higher. These views are not surprising. Buyers always want to pay less and sellers always want to get paid more. But is there a right price for turkey from the standpoint of society as a whole. In previous , we saw how in market economies the forces of supply and demand determine the prices of goods and services and the quantities sold. So far however we have described the way markets allocate scarce resources   without directly addressing the question of whether these market allocations are desirable. In other words our analysis has been positive rather than normative what should be. We Know that the price of turkey adjusts to ensure that the quantity of turkey supplied equals the quantity of turke...

When a good is taxed buyers and sellers of the good share the burden of the tax. But how exactly is the tax burden divided? Only rarely will it be shared equally. To see how the burden is divided consider the impact of taxation in the two markets. In both cases figure shows the initial demand curve the initial supply curve and a tax that drives a wedge between the amount paid by buyers and the amount received by sellers. Not drawn in either panel of the figure is the new supply or demand curve. Which curve shifts depends on on whether the tax is levied on buyers or sellers. As we have seen this is irrelevant for the incidence of the tax. The difference in the two panels is the relative elasticity of supply and demand. A tax in a market with very elastic supply and relatively inelastic demand. That is sellers are very responsive to changes in the price of the good so the supply curve is relatively flat whereas buyers are not very responsive so the demand curve is rel...

In 1990 Congress adopted a new luxury tax on items such as yachts airplanes furs jewelry and expensive cars. The goal of the tax was to raise revenue from those who could most easily afford to pay. Because only the rich could afford to buy such extravagances taxing luxuries seemed a logical way of taxing the rich. Yet when the forces of supply and demand took over the outcome was quite different from what Congress intended. Consider for example the market for yachts. The demand for yachts is quite elastic. A millionaire can easily not buy a yacht she can use the money to buy a bigger house take a European vacation or leave a larger bequest to her heirs. By contrast the supply of yachts is relatively inelastic at least in the short run. Yacht factories are not easily converted to alternative uses and workers who build yachts are not eager to change careers in response to changing market conditions. Our analysis makes a clear prediction in this case. With elastic d...