The area beneath a demand curve

   These years, one of the most frequently asked questions after class from my students is, to my surprise, what the area beneath a demand curve is about, or why the area can represent the benefit of the consumers. I am surprised as I think students should have learned this even in high-school economics class. Upon reflection, I think the problem is this. What they have learned is about consumer surplus, not exactly about the area beneath the demand curve. Though the latter is a step involved in deriving consumer surplus, students may forget the steps (or the reason behind) but remember only the conclusion. 

   Hence, to understand the meaning of the area beneath, we need to start from the beginning, and to think in steps. Put it simply. Suppose a person's demand for a good is this. To obtain the 1st unit of the good, the maximum amount the person is willing to pay is $10. But to obtain another unit, the person will pay only $8. To obtain the 3rd unit, pay $6. To obtain the 4th, pay $5, etc. Since one will never pay more than one's evaluation of the good, the above money values are the highest values one place upon the respective units of the goods. In other words, the person considers the benefit of the consuming 4 units of the good is $10+$8+$6+$5=$29. This is exactly the area beneath the "demand curve" (here, it is not exactly a curve but only a schedule; however, the logic is the same for a curve or a schedule). And so the area represents a consumer's benefit of consuming a good up to certain quantity. 

   Nonetheless, this benefit is in "gross" term. In fact, the person must pay a price for obtaining the good. Suppose that the market price of the good is $5.5. Then, the person will buy only 3 units (the 4th unit is valued only at $5, lower than the price). The "gross" benefit obtained from 3 units is $10+$8+$6=$24. The cost of obtaining it is $5.5x3=$16.5. The consumer surplus is $24-$16.5=$7.5. 

   Many students remember that the triangle area beneath the demand curve, but above the price line, is consumer surplus, which represents also consumer's benefit from obtaining the good. But they forget that it is only the net benefit, the benefit net of cost. For the net benefit concept, one must first identify the gross benefit. The latter is a more fundamental concept. 

   For learning economics, the most important part is to understand why. Remembering the conclusion without understanding is meaningless. Is the common teaching practice in high school to make sure students remember the conclusions, or to make sure students understand? If the common practice is really the former, not the latter, then this will creates a lot of difficulties to students when they learn economics in universities. Even if they do not need to learn economics in universities, understanding why is still the most important and meaningful part in economics (even if it is for high school). In "hi, economics" I write many posts with "why" (or "but why") as part of the titles: for law of demand, for aggregate demand, for think at the margin, etc. The reason why there are so many "why" here is that "why" is really important.