Final answer:
Total surplus in a market is the sum of consumer surplus and producer surplus, representing the total net benefit that consumers and producers receive from trading. It is maximized at the market equilibrium and diminishes when the market is not at equilibrium, leading to deadweight loss.
Step-by-step explanation:
The total surplus in a market is the measure of the economic benefit to both consumers and producers, derived from trading in the market. It is a key concept in microeconomics, reflecting the overall efficiency of a marketplace.
The correct answer to the student's question is that total surplus is the sum of the total consumer surplus and the total producer surplus. This can be explained as follows:
- Consumer surplus is the difference between what consumers are willing to pay for a good or service, which signifies their maximum value, and what they actually pay at the market equilibrium price. This represents the benefit that consumers receive from paying less than what they are willing to for a good or service.
- Producer surplus is the difference between what producers are willing to accept as payment, based on their costs, and what they actually receive at the market equilibrium price. This represents the benefit to producers from receiving more for their product than the minimum they were willing to accept.
Therefore, the total surplus is an aggregation of these two surpluses, showing the total benefit to society as a result of market transactions. The option (2) The sum of the total consumer surplus and the total producer surplus accurately defines total surplus.
A loss in total surplus due to inefficient market conditions is known as deadweight loss, which occurs when the trade in the economy is below or above the equilibrium level. Total surplus is maximized at the market equilibrium point, as it is the quantity and price at which the combined welfare of consumers and producers is greatest.