Which of the following is a typical effect of growth for a business in terms of economic surplus and efficiency?

• A. An increase in producer surplus due to higher output and potential economies of scale
• B. A reduction in overall market efficiency
• C. A decrease in consumer surplus as the business grows
• D. A decrease in total economic surplus

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of economic surplus, which is the sum of consumer surplus and producer surplus. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, while producer surplus is the difference between the price producers receive and their cost of production.
2. Step 2: Recognize that when a business grows, it often increases its output. This can lead to economies of scale, meaning the average cost of production decreases as the quantity produced increases.
3. Step 3: Analyze how economies of scale affect producer surplus. Lower average costs allow producers to earn higher profits at the same price or offer lower prices while maintaining profitability, thus increasing producer surplus.
4. Step 4: Consider the impact on consumer surplus and overall market efficiency. Growth that leads to lower costs and potentially lower prices can increase consumer surplus and improve market efficiency, rather than reducing them.
5. Step 5: Conclude that the typical effect of business growth is an increase in producer surplus due to higher output and economies of scale, which generally contributes to an increase in total economic surplus and market efficiency.