Question

Price 8.15 Supply 5 3.65 Demand 220 400 39. Quantity Refer to the graph shown. In equilibrium, total surplus is equal to:

Answer 1

39. A market is in equilibrium when the quantity of demand is equal to quantity supplied. At a price of $5 the market demand is equal to market supply. The equilibrium quantity is 400 and equilibrium price is $5. The point of intersection between the market demand curve and the market supply curve determines the equilibrium quantity and equilibrium price.

Total surplus is the total of surplus earned by the consumers and the producers at the equilibrium. Consumer’s surplus is the difference between the price the consumers are willing to pay and the price paid by the consumers in order to purchase the commodity. At equilibrium the consumers can purchase the commodity at $5, but they are willing to pay $12. Thus the total area of the consumer surplus is the area below the demand curve and above the price line. The value of this area is $1400(base × height/2, base is 400, height is $7(12-5).

Producer surplus is the difference between the price at which the producers are willing to supply and the price actually received by them. At the equilibrium price of $5, the producers are willing to supply at $2 but they receive a price equal to $5. Thus the total surplus gained by the producers is the area below the price line and above the supply curve which is equal to $600(base × height/2).

At the equilibrium the total surplus generated is equal to $1400+$600= $2000.