Economics Unit 2: competitive markets

Law of demand

Law of demand

As price increases, quantity demanded decreases

Law of supply

As price increases, quantity supplied increases

Law of diminishing marginal utility

Less utility as more of a g/s is consumed

Allocative efficiency

Optimal distribution and us of resources to maximize outputs and satisfy wants without waste

Surplus

excess supply, signals producers to lower price

Shortage

Excess demand, signals producers to raise price

Market equilibrium price

Price at which quantity demanded and supplied are equal

Efficiency

A point at which no individual can be made better off without making another worse off, where MB=MC

Consumer surplus

When a g/s is bought at a lower price than what they were willing able to (can be called additional savings)

Producer surplus

A g/s is sold at a higher price than what they were willing and able to (additional profit)

Community surplus

Consumer and producer surplus

Total welfare

Community surplus, including utility and other non-monetizable aspects.

Marginal social benefit

Demand for goods represent the benefit society derives from the consumption of that good. Decreases at higher levels of consumption because of decreasing marginal utility.

Marginal social cost

Supply for a good represents cost to society of producing the good. The Greater the amount produced, the more it costs to produce each additional good.

Price Mechanism

The way price changes in response to demand or supply, SIRA can help to explain this

Productive efficiency

Producers are producing at the lowest possible average cost, but allocative efficiency means that they produce the best combination of goods from the society’s point of view.

Supply is not an amount, it is the

sellers behaviour

Price is _____________ related to the quantity supplied.

directly or positively

Profit Motive

The higher the price, the more revenue for the producer and a greater incentive to increase production.

Price DOES NOT change ____________________.

supply or demand, it affects quantity.

normal good

people buy MORE when they have MORE money & less when they have less money

inferior good

people buy MORE when they have LESS money & less when they have more money

where is surplus and shortage on graph

where is consumer and producer surplus