Answer to Question #147792 in Microeconomics for Ivo

Question

Explain what is meant by consumer and producer
surplus. How and why is total surplus maximised in a competitive market equilibrium?

Answer 1

Consumer surplus is the difference that is normally seen in the market situation where the price is considered the highest by consumers in a certain market situation and the price they can comfortably purchase goods and services without feeling that they have been exploited while on the other hand producer surplus is the difference that is exhibited between the amount in price a buyer or someone will be comfortably willing to accept a certain quantity and the amount of money they can earn or get from selling the same goods and services in the market at the prevailing prices. Normally, the total surplus is maximized when commodities' prices go way beyond the equilibrium prices that are prevailing in the market. The eventual is the sharp decline in the total surplus, or at times it remains constant. In essence, therefore, at the point of equilibrium, the total surplus is fully maximized. This is a crucial point because it's where the maximum profit and benefits are made for both the producers and the consumers.