Question

QUESTION 40 Assuming the market is in equilibrium, what happens to total surplus if demand increases? Total surplus will stay the same. Total surplus will decrease. Total surplus will increase. Total surplus will decrease and then increase.

Answer 1

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Answer: Total surplus will increase

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, whereas producer surplus is the difference between what the producer is paid and the marginal costs of production. Oftentimes, we want to look holistically at the market and calculate market/private surplus, a measure of the net benefits accruing to all participants in the market.

When demand increases demand curve shifts to the right which means the equilibrium quantity and equilibrium price both increases

If demand increases, and the demand curve shifts to the right, producer surplus increases as the equilibrium price has increased.

If demand curve shifts to the right then Consumer surplus increases as willigness to pay for each consumers increase, even though price has increases it is compensated by a larger increase in willingness to pay.

Since both consumer surplus and producer surplus has increased, total suplur increases