Question

Market equilibrium ( Assessment task )

Instructions

In this activity you must apply the market equilibrium behavior, social surplus and consumer and producer surpluses.

INSTRUCTIONS:

Please answer the questions below, you should review the rubric that appears at the bottom of the exercises. Please review the module material for more information that you can search in the virtual library. Remember you can search your database, please nothing other than reliable sources of information.

1. What is consumer surplus? Using real data, what information would you need to measure consumer surplus in a particular product?
2. What is producer surplus? Using real data What information would you need to measure producer surplus in a conceto product?
3. What country wins with trade?
4. How does trade influence the production and consumption of each country?

Answer 1

Consumer surplus is the difference between what a consumer is willing to pay and what he actually pays. It is the area under the downward sloping demand curve.

In order to measure consumer surplus from real data we need three things.The first is the market price of the product, the second is the quantity demanded of that product and the third is the slope of the demand curve or the elasticity.

Producer surplus is the difference between what a producer is willing to charge and what he actually gets. This is determined by the supply curve.

In order to get producer surplus from real data we need to know the price of the product, the quantity supplied and the elasticity of the supply curve. These three things will help us determine the producer surplus.

Trade makes all the nations better off. It is because with trade nations can specialize in the production of a commodity in which they have a comparitive advantage. This will also help more people getting employment in the production of this commodity. It leads the nations trading in getting more product than what they got when they were not trading. Thus trade makes the nations trading better off.

With trade nations specialize in the production of the commodity they have a comparitive advantage in thereby increasing the production of the commodities. For the consumption to increase we need two things. The consumer should be willing to buy the product and it should be priced so that it can be bought under his budget. If these conditions are fulfilled, consumers buy the product from the producers resulting in trade. On the other hand, if the producers can sell their good and also there is an increase in the demand for that good, there will be an increase in the production.