Answered: A competitive equilibrium is defined by…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

A competitive equilibrium is defined by the price P* and quantity Q*. Suppose the
consumers become less price sensitive, but the same price-quantity equilibrium is maintained.
Illustrate the change on a graph, labeling the old and new linear demand curves. What happens
to consumer and producer surplus?

Definition Definition Consumer surplus is the consumers' gain from trade. The consumer surplus is the area below the demand curve but above the equilibrium price, up to the equilibrium quantity. Producer surplus is the producer's gain from trade. The producer surplus is the area above the supply curve but below the equilibrium price, up to the equilibrium quantity. Consumer surplus is represented by Area A and producer surplus is represented by Area B.

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