CFU #5: Market Equilibrium & Disequilibrium

Based on the graph above, the consumer surplus at the market equilibrium price and quantity is shown by which area?

• GMK

• GMN

• GZN

• ZMN

• MNK

Answer explanation

Consumer surplus is the difference between the maximum price consumers are willing to pay for a unit of a product (as depicted by the demand curve) and the actual price they do pay. At equilibrium, the consumer surplus is measured by the area of the triangle under the demand curve but above the equilibrium price for the quantities between zero and equilibrium quantity, QR. It is represented by the area ZMN.

In the absence of market failures, a perfectly competitive market equilibrium is efficient for which of the following reasons?

• Consumer surplus is maximized and consumers are better off relative to producers.

• Producer surplus is maximized and producers are better off relative to consumers.

• Total economic surplus is maximized and all mutually beneficial transactions are exhausted.

• Total economic surplus is distributed equally between producers and consumers.

• The quantity of output is produced at a constant cost so that every consumer pays the same price.

Answer explanation

The competitive market in equilibrium is efficient because it maximizes the sum of consumer surplus and producer surplus. Perfectly competitive markets in equilibrium ensure that all mutually beneficial transactions are exhausted; that is, all opportunities to make some people better off without making other people worse off have been satisfied.

Based on the graph above, the producer surplus at the market equilibrium price and quantity is shown by which area?

• GMK

• GMN

• GZN

• ZMN

• MNK

Answer explanation

Producer surplus is the difference between the minimum price for which producers are willing to sell a product (as depicted by the supply curve) and the actual price they do receive. At equilibrium, the producer surplus is measured by the area of the triangle above the supply curve but below the equilibrium price for the quantities between zero and equilibrium quantity, GZN.

Which of the following is most likely to occur when a competitive market adjusts from one equilibrium to another?

• A decrease in demand will cause the equilibrium price, equilibrium quantity, and total surplus to increase.

• An increase in demand will cause the equilibrium price, equilibrium quantity, and producer surplus to increase.

• A decrease in supply will cause the equilibrium price to decrease, the equilibrium quantity to increase, and consumer surplus to decrease.

• An increase in supply will cause the equilibrium price to increase, the equilibrium quantity to decrease, and consumer surplus to increase.

• A decrease in supply and increase in demand will cause the equilibrium quantity to decrease but the equilibrium price to be indeterminate.

Answer explanation

An increase in demand shifts the demand curve to the right. A rightward shift in the demand curve results in an increase in the equilibrium price and the equilibrium quantity, which causes producer surplus (the triangle below the equilibrium price and above the supply curve) to increase.

Assume the market for a good is in equilibrium. An increase in the market supply of the good will result in

• a shortage at the original price of the good, which causes the market price to decrease

• a shortage at the original price of the good, which causes the market price to increase

• a surplus at the original price of the good, which causes the market price to decrease

• a surplus at the original price of the good, which causes the market price to increase

• neither a surplus nor a shortage

Answer explanation

An increase in supply will create a surplus at the original price, because quantity supplied will exceed quantity demanded at the original price, resulting in a downward pressure on prices, which causes the market price to decrease.