Question

What is the relationship between total surplus and economic efficiency?

Short answer

The greater the total surplus, the higher the economic efficiency

Step-by-step solution

Definition 

• Total surplus : Sum of producer and consumer surplus. Total surplus is maximum when both consumer and producer surplus is maximum.
• Consumer surplus: The price consumer actually pays is lower than what he was willing to pay ,
• Producer surplus: The price paid to a producer is more than the price he was willing to charge for a good.

Explanation

The greater the total surplus, the higher the economic efficiency .The sum of consumer surplus and producer surplus is total surplus, also referred to as economic surplus or social surplus. In Figure above we show total surplus as the area (red+ blue ). Total surplus is larger at equilibrium quantity and price than it would be at any other quantity. This demonstrates the economic efficiency of the market equilibrium. In addition, at the efficient level of output, it is impossible to produce greater consumer surplus without reducing

producer surplus, and it is impossible to produce greater producer surplus without reducing consumer surplus.