Question

Given below are two statements:
Statement (I): The sum of consumer surplus and producer surplus is known as total economic surplus.
Statement (II): Any shift of the supply curve to the left reduces the consumer surplus. In light of the above statements, choose the most appropriate answer from the options given below.

• A. Both Statement (I) and Statement (II) are correct.
• B. Both Statement (I) and Statement (II) are incorrect.
• C. Statement (I) is correct but Statement (II) is incorrect.
• D. Statement (I) is incorrect but Statement (II) is correct.

Hint:

Total Economic Surplus = Consumer Surplus + Producer Surplus. Leftward supply shift $\rightarrow$ Decreased Supply $\rightarrow$ Reduced Consumer Surplus.

Answer 1

The Correct Option is A

Both statements are correct. Total economic surplus is calculated as the sum of consumer surplus (the benefit consumers receive above the price they pay) and producer surplus (the benefit producers receive above the price they are willing to sell for). A leftward shift of the supply curve signifies a decrease in supply. This typically results in a higher equilibrium price and a lower quantity traded, leading to a reduction in consumer surplus.

Answer 2

Graphical reasoning:
On a standard demand-supply diagram, consumer surplus is the area between the demand curve and the equilibrium price, while producer surplus is the area between the supply curve and the equilibrium price; their sum is exactly the area between the demand and supply curves up to the equilibrium quantity, which is by definition total economic surplus, so Statement (I) is true. If the supply curve shifts left, the equilibrium price rises and the equilibrium quantity falls; the triangle representing consumer surplus shrinks because the higher price cuts into it from below and the smaller quantity cuts into it from the side, so Statement (II) is also true. Both statements hold, confirming option (1).