2.3 Competitive market equilibrium

Competitive market

A market with many firms acting independently where no firm has the ability to control the price.

Competitive market equilibrium

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

Consumer surplus

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.

Equilibrium

A state of balance that is self-perpetuating in the absence of any outside disturbance.

Excess demand

Occurs when quantity demanded at some price is greater than quantity supplied.

Excess supply

Occurs when quantity supplied at some price is greater than quantity demanded.

Incentive role of prices

Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.

Marginal benefit

The extra or additional benefit enjoyed by consumers that arises from consuming one more unit of output.

Marginal costs

The extra or additional costs of producing one more unit of output.

Market

Any arrangement where buyers and sellers interact to carry out an economic transaction.

Market equilibrium

In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.

Market mechanism

The system in which the forces of demand and supply determine the prices of products. Also known as the price mechanism.

Price mechanism

The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.

Producer surplus

The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive.

Rationing

A method used to divide or apportion goods and services or resources among the various interested parties.

Resource allocation

Apportioning available resources or factors of production to particular uses for production purposes.

Shortage

Arises when the quantity demanded of a good or services is more than the quantity supplied at some particular price.

Signalling

In asymmetric information, the participant with more information sending a signal revealing relevant information about a transaction to the participant with less information, to reduce adverse selection.

Social/community surplus

The sum combination of consumer surplus and producer surplus.

Surplus

An excess of something over something else. It occurs: when quantity supplied is greater than quantity demanded at a particular price when tax revenues are greater than government spending (budget surplus) on an account when credits are greater than debits in the balance of payments. See also "consumer surplus" and "producer surplus".