Explain how consumer and producer surplus are maximized at the equilibrium price

Explain how consumer and producer surplus are maximized at the equilibrium price

 

  • explain how consumer and producer surplus are maximized at the equilibrium price

 

 

consumer surplus is the excess benefit consumers get from paying less than what they are willing and able to pay

it can be represented by the shaded area between the demand line (what they are willing and able to buy) and the price line

 

 

producer surplus is the excess benefit producers get from producing at a cost less than what consumers pay for the product. it can be represented by the shaded area between the supply line (what they are willing and able to produce) and the price line

 

Welfare is maximized at the equilibrium where dd=ss. This is because as seen from the diagram, the incremental benefit consumers get from consumption is equal to the incremental cost producers take to produce the good.

if the society consumes more than this output, the consumers’ demand is higher than the producers supply, this suggests that not all surplus has been captured, and there is a welfare loss.

if the society consumes less than this output, the consumers’ demand is lower than the producers supply, this suggests that not all surplus has been captured, and there is a welfare loss.

hence, only when the society consumes at dd=ss, will both the consumer and producer surplus be maximised

By | 2015-10-07T02:46:36+00:00 October 7th, 2015|Economics resources, Micro: Demand & Supply|0 Comments

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