In the November 2015 issue of ECONOMIC REVIEW (Vol. 33, No. 2), I considered how diagrams can be used in economic analysis and promised some further discussion. In this column, I will look at situations in which it becomes important to define areas on diagrams, or where different curves have a fixed relationship with each other.
The notion of consumer surplus is an important idea used in economic analysis. It is most readily explained using a diagram such as Figure 1. Here we see the market for a good, showing the supply and demand curves. You will see that the demand curve has been labelled to indicate marginal social benefit (MSB). This is one way in which we can interpret what the demand curve represents.
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