Figure: Basic Supply and Demand
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In a free market, as illustrated in the diagram, total gains from trade are greatest when:

Question

Figure: Basic Supply and Demand
M 
In a free market, as illustrated in the diagram, total gains from trade are greatest when:

Quizplus · Accepted Answer

The point where the supply and demand curves intersect is the equilibrium price and quantity. At this point, there is no surplus or shortage of the good, and all buyers and sellers are satisfied. In this diagram, the equilibrium point is where 50 units are sold at a price of $3. This is the point where total gains from trade (i.e. consumer surplus + producer surplus) are maximized. At any other point, there will be either a surplus or a shortage, which creates inefficiencies and reduces total gains from trade.