Question

Illustrate consumer and producer surpluses with demand and supply diagrams and explain how to maximize the total surplus (consumer surplus + producer surplus) at the equilibrium level.

Answer 1

We may calculate the consumer surplus as the area under the demand curve up to the equilibrium quantity and above the equilibrium price if we add up the gains at each quantity. The area labeled F in the diagram represents the consumer surplus. The supply curve depicts the quantity of goods that companies are willing to sell at each price point.