Question

What is the relationship between total surplus and economic efficiency?

Short answer

When an economy's entire surplus is maximized, allocation said to be efficient.

Step-by-step solution

Definition

Trade is a market concept that allows people to get commodities they do not have and acquire them in exchange. Furthermore, trade can happen both within local borders and on a broad scale with other countries throughout the globe. Furthermore, trade fosters competition, which benefits product consumers by allowing them to decide on a wider range of products at lower prices.

Explanation

When it's impossible to boost the status of 1 party without imposing a value on another, economists call this efficiency. Inefficient situations, on the opposite hand, allow a minimum of one person to profit without imposing costs on others.

The higher the total surplus, the more efficient the economy is. Total surplus and thus economic efficiency are maximized at the free market equilibrium quantity. The total surplus would be lower at any quantity other than equilibrium, and so economic efficiency would be worse.

So, resource allocation is considered to be efficient when total surplus is maximized.