Question

12. a. (3) Define and give your own example of consumer surplus. b. (3) Define and give your own example of producer surplus. c.(3) Why do economist use consumer and producer surplus to measure the costs and benefits of trade and protectionism?

13. a. (3) What is Adam Smith’s invisible hand of the market? b. (3) What does this imply about international trade?

Answer 1

FIRST QUESTION

PART-A

CONSUMER SURPLUS-

• consumer surplus is the area which defines the price which a consumer is ready to pay and what he actually pays.
• EXAMPLE-suppose jack wants to purchase a coat and he is ready to spend $120 for the coat but in the market due to an offer he got the coat for $90.
• now the consumer surplus would be the price difference of price willing to pay and price actually paid.
• consumer surplus=$120-$90=$30

PART -B

PRODUCER SURPLUS-

• producer surplus is the area which represents the minimum price a seller is ready to sell his product for and the actual price for which he sells his product.
• example-suppose a seller wants to sell a pen for $10 and a consumer come to his shop and instead of asking for the price he offered $20 for the pen.
• now the difference is of $10 and this would be the producer's surplus.

PART-C

IMPORTANCE OF THE STUDY OF CONSUMER SURPLUS AND PRODUCER SURPLUS-

• with the study of the respective market the economist would come to know that which segment dominates the market.
• they would also come to know whether the market is consumer market or seller market
• they would use the information to make relevant policies

SECOND QUESTION-

PART -A

INVISIBLE HAND OF MARKET-

this concept was given by Adam Smith and this represents the automatic forces of the market.Adam Smith told that whenever there is any instability in the market which would lead to disequilibrium then there is no need of government's intervention because the demand and supply forces of market would bring the economy at earlier point and restore it to the equilibrium point.

therefore the automatic forces demand and supply are the main components of the invisible hands.

PART-B

IMPLICATION TO FOREIGN TRADE-

this would imply that there should be free trade between two or more countries and there should not be any term existing like tariff, import quota or any restrictions imposed by the government so the economy can access the resources and work at its full capacity.