Total surplus in a market.... A. Measures how well off consumers are relative to

Question

Total surplus in a market....

A. Measures how well off consumers are relative to producers, and can be calculated by

B. Measures how well off the economy as a whole is at a particular market price, and can be calculated by

C. Measures how well off producers are relative to consumers, and can be measured by

D. Is maximized at any price in the economy, and can be measured by

A. Measures how well off consumers are relative to producers, and can be calculated by

B. Measures how well off the economy as a whole is at a particular market price, and can be calculated by

C. Measures how well off producers are relative to consumers, and can be measured by

D. Is maximized at any price in the economy, and can be measured by

Explanation / Answer

Answer: Option b. How well off the economy as a whole is at a particular market price and can be calculated by

Explanation: Total surplus in a market is how well off the economy as a whole is at a particular price and can be calculated by adding up Consumer Surplus and Producer Surplus.

Total Surplus = Consumer Surplus + Producer Surplus

As we all know Consumer Surplus is defined as the “difference between the price that an individual is willing and able to pay for a particular commodity and the actual price that he pay for it.” On the other hand Producer Surplus can be defined as “the difference between the price at which he is willing to sell the particular commodity that he is producing and the market price of the commodity.”

Total Surplus is attained by calculating both producers surplus and consumers surplus .

When the market price is lower than the price that the consumer is willing to pay the consumer is enjoying a consumer surplus, but at the cost of firms who are producing the commodity. On the other hand if the price is greater than the market price which is higher than what the consumer is willing to pay, in that case consumer surplus is decreased and producers surplus is increased.

Therefore it can be concluded that total surplus can be maximised only when the price is equal to the equilibrium price.

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