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.
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.
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.
Show Hint
A leftward shift of the supply curve increases market prices, which always hurts consumers by reducing consumer surplus.
Updated On: Jul 13, 2026
- Both Statement (I) and Statement (II) are correct.
- Both Statement (I) and Statement (II) are incorrect.
- Statement (I) is correct but Statement (II) is incorrect.
- Statement (I) is incorrect but Statement (II) is correct.
Show Solution
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The Correct Option is A
Solution and Explanation
Step 1: Understanding the Concept:
Welfare economics uses consumer surplus and producer surplus to measure market efficiency and social welfare.
Step 2: Detailed Explanation:
Let us evaluate each of the statements:
- Statement (I): The sum of consumer surplus and producer surplus is known as total economic surplus.
This is correct.
Consumer surplus represents the benefit consumers receive from purchasing a good at a price lower than their maximum willingness to pay.
Producer surplus represents the benefit producers receive from selling a good at a price higher than their marginal cost of production.
The sum of these two measures:
\[ \text{Total Economic Surplus} = \text{Consumer Surplus} + \text{Producer Surplus} \] This sum measures the net benefit generated by the market, making Statement (I) correct.
- Statement (II): Any shift of the supply curve to the left reduces the consumer surplus.
This is correct.
A leftward shift of the supply curve represents a decrease in supply.
In a competitive market with a downward-sloping demand curve, a decrease in supply increases the equilibrium price ($P^* \uparrow$) and decreases the equilibrium quantity ($Q^* \downarrow$).
Because consumer surplus is the area below the demand curve and above the market price line, an increase in the market price reduces the size of this area.
Thus, a leftward shift of the supply curve reduces consumer surplus.
Therefore, both statements are correct.
Step 3: Final Answer:
Both Statement (I) and Statement (II) are correct.
Welfare economics uses consumer surplus and producer surplus to measure market efficiency and social welfare.
Step 2: Detailed Explanation:
Let us evaluate each of the statements:
- Statement (I): The sum of consumer surplus and producer surplus is known as total economic surplus.
This is correct.
Consumer surplus represents the benefit consumers receive from purchasing a good at a price lower than their maximum willingness to pay.
Producer surplus represents the benefit producers receive from selling a good at a price higher than their marginal cost of production.
The sum of these two measures:
\[ \text{Total Economic Surplus} = \text{Consumer Surplus} + \text{Producer Surplus} \] This sum measures the net benefit generated by the market, making Statement (I) correct.
- Statement (II): Any shift of the supply curve to the left reduces the consumer surplus.
This is correct.
A leftward shift of the supply curve represents a decrease in supply.
In a competitive market with a downward-sloping demand curve, a decrease in supply increases the equilibrium price ($P^* \uparrow$) and decreases the equilibrium quantity ($Q^* \downarrow$).
Because consumer surplus is the area below the demand curve and above the market price line, an increase in the market price reduces the size of this area.
Thus, a leftward shift of the supply curve reduces consumer surplus.
Therefore, both statements are correct.
Step 3: Final Answer:
Both Statement (I) and Statement (II) are correct.
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