The diagram below shows the demand and supply curves in a perfectly competitive market.
FIGURE 12-5
-Refer to Figure 12-5. If output in this market were Q3, the loss in total economic surplus relative to the competitive equilibrium would be illustrated by area
A) 1.
B) 2.
C) 3.
D) 4.
E) 3 + 4.

Question

The diagram below shows the demand and supply curves in a perfectly competitive market.
  FIGURE 12-5
-Refer to Figure 12-5. If output in this market were Q3, the loss in total economic surplus relative to the competitive equilibrium would be illustrated by area
A) 1. 
B) 2. 
C) 3. 
D) 4. 
E) 3 + 4.

Quizplus · Accepted Answer

The competitive equilibrium occurs where the demand and supply curves intersect, at output level Q1 and price level P1. 
If output were Q3, the price would be P3, which is higher than the competitive equilibrium price. This would result in a loss of consumer surplus (area 3) and a gain in producer surplus (area 2). 
However, the increase in producer surplus would not be enough to offset the loss in consumer surplus, resulting in a net loss in total economic surplus (areas 3 + 4).

The Diagram Below Shows the Demand and Supply Curves in a Perfectly