Figure 7.1 The Demand Curve for a Particular Good
that total willingness to pay (WTP) is represented by the area underneath the demand curve up to quantity Q1. This results from the fact that the prices measured along a demand curve represent consumers' marginal benefit or valuation, the dollar value they attach to each additional unit of the product.
Table 7.1 shows a hypothetical demand schedule for oranges. If I observe you buying four oranges when the price of oranges is $0.25, I can infer that you did not buy the fifth orange because it was worth less than $0.25 to you. If the price of oranges is $050 per orange and you buy only three oranges, I can infer that the third orange is worth $0.50, but the fourth orange is worth only S0.25. Likewise, the second orange is worth $0.75, and the first orange is worth
$1.00. Thus, a market price reflects a consumer's marginal valuation or benefit, the amount of money he or she is willing to pay for the last, or "marginal," unit consumed.
If we add up all the valuations for each of the units, we obtain the total valuation or the amount consumers are willing to pay for all the units. This dollar amount, represented by the total area underneath the demand curve up to
quantity Q1 in figure 7.1, is the total willingness to pay, or the total benefit to
consumers of that amount of output. If we look only at the actual consumer
expenditure (the area of the rectangle in figure 7.1), we would typically under estimate the total willingness to pay, or the benefits to society of producing that output. In the numerical example of table 7.1, the total willingness to pay for four oranges rather than do without is the marginal benefit of the first orange ($1.00) plus the marginal benefit of the second ($0.75) plus that of the third ($0.50) and fourth ($025), for a total of $2.50. If the price of oranges were S0.25, the amount actually spent on oranges would be only Sl.00. Further more, if the government had decided to provide the good free of charge, such
as in the case of vaccinations by a public health clinic, there would be no consumer expenditure to measure. In this case, the quantity demanded in figure 7.1 •would be Q2 at the zero price, and the total willingness to pay would be the monetary value of the entire area underneath the demand curve up to quantity Qi.