In the context of calculating consumer and producer surplus at market equilibrium, which of the following best describes the correct quantitative approach?

• A. Multiply the equilibrium price by the equilibrium quantity.
• B. Subtract the equilibrium quantity from the equilibrium price.
• C. Divide the number of cars by the number of people in the market.
• D. Calculate the area between the demand and supply curves up to the equilibrium quantity.

Answer: (D)

Verified step by step guidance

1. Understand that consumer surplus is the area between the demand curve and the equilibrium price, representing the benefit consumers receive from paying less than what they are willing to pay.
2. Recognize that producer surplus is the area between the supply curve and the equilibrium price, representing the benefit producers receive from selling at a price higher than their minimum acceptable price.
3. Identify the equilibrium quantity where the demand and supply curves intersect, which determines the quantity traded in the market.
4. Calculate the consumer surplus as the area of the triangle formed above the equilibrium price and below the demand curve, up to the equilibrium quantity. This can be expressed as \(\frac{1}{2} \times \text{base} \times \text{height}\), where the base is the equilibrium quantity and the height is the difference between the maximum willingness to pay and the equilibrium price.
5. Calculate the producer surplus similarly as the area of the triangle below the equilibrium price and above the supply curve, up to the equilibrium quantity, using the same formula for the area of a triangle.