When markets reach the ____ price all the opportunities for mutually beneficial trade have taken place and the sum of consumer and producer surplus is ____.

Question

Quizplus · Accepted Answer

Equilibrium is the price at which quantity demanded equals quantity supplied. At this price, all possible trades that are mutually beneficial have already taken place. At any other price, either there will be excess demand (shortage) or excess supply (surplus), which implies that some mutually beneficial trades are still possible. At equilibrium, the sum of consumer and producer surplus is maximized because it reflects the total gains from trade. Both consumers and producers get a portion of the gains from trade, and this is reflected in the prices they pay and receive, respectively. Choice A is incorrect because the minimum price is either a price floor imposed by the government or a price that is so low that quantity demanded is much higher than quantity supplied, indicating a shortage. In this case, some mutually beneficial trades cannot take place. Choice B is incorrect because the maximum price is either a price ceiling imposed by the government or a price that is much higher than equilibrium price, indicating a surplus. In this case, some mutually beneficial trades cannot take place at the maximum price. Choice D is incorrect because consumer and producer surplus are not shared equally between them; rather, the size of the surplus depends on the elasticity of demand and supply, and the distribution of bargaining power between them.

When Markets Reach the ____ Price All the Opportunities for Mutually