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) 2.
B) 1.
C) 4.
D) 3 + 4.
E) 3.

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) 2. 
B) 1. 
C) 4. 
D) 3 + 4. 
E) 3.

Quizplus · Accepted Answer

The competitive equilibrium output is Q2 where the demand and supply curves intersect. If the output were Q3, the price would fall to P3, which is below the minimum point on the average variable cost curve. This means that firms would exit the market, which would result in a reduction in economic surplus. The loss in producer surplus is illustrated by area 3, and the loss in consumer surplus is illustrated by area 4. The total loss in economic surplus relative to the competitive equilibrium is the sum of these areas, which is 3 + 4.

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