Economics question...?

Question

So I have been stumped by this question for a while now...I'm losing my mind. I'm sure this is super simple but I just can't get my brain around it. Here's my question:

Explain why the combination of consumer & producer surplus is not maximized if there is either excess demand or supply.

Any help or websites or anything would be greatly appreciated.

Answer 1

I think the problem may be the definition of the term surplus.  Although it is being correctly used here some people think it is misleading.

The best case is matching supply and demand which makes the best economic sense.  If consumer demand is low, producer or inventory supply grows and drains revenues (by increasing expenses).  If consumer demand it higher than supply, then there is revenue that cannot be earned.  Some say that prices can rise in a shortage but that is not always true and you still have unmet demand that can go to a competitor.

Answer 2

This is pretty easy. Think of it visually. Take a look at this picture:

http://upload.wikimedia.org/wikipedia/en...

When there is an excess in demand, the consumer surplus becomes a bigger triangle, but the producer surplus becomes a smaller triangle (because it is bounded by the same supply line. I wish I had a picture for you, but I don't on this computer and I can't find one on google. Anyway, if you think about it, the overall area of both triangles is smaller.

Thats the easiest way to think about it.

I hope it helped.