Economics HL - Supply & Demand

Ceteris Paribus

“everything remains as it is”

As price increases

Quantity demand decreases

As price decreases

Quantity demanded increases

Income Effect

Spending power increases, consumers able to purchase more goods

Law of Diminishing Marginal Utility

As more consumed, additional utility from each extra unit decreases.

Less satisfaction

Downward slope of demand

Marginal Costs

Extra cost per unit produced

Law of Diminishing Marginal Returns

As you add more of one factor of production (while keeping others constant), additional output will eventually decrease.

Allocative Efficiency

Nobody can be made better off without making someone else worse off.

Consumer Surplus

Amount customer is willing to pay vs. what they actually pay

Producer Surplus

Amount producer is willing to sell for vs. how much they sell it for.

Social Surplus

Producer + Consumer Surplus

Maximum Social Welfare

Social surplus is maximized. MB = MC

MB > MC

The activity or production is too modest. You gain more in benefit than you spend in cost, so increasing output or consumption would increase the total net benefit. 

MB < MC

You are spending more on an additional unit than you are gaining from it. Decreasing output or consumption would improve the total net benefit by avoiding these unproductive costs. 

MB = MC

You have found the optimal point. Any further increase in production or consumption would result in marginal costs exceeding marginal benefits, leading to a decrease in the overall net benefit. 

MB = MC

Marginal Benefit equals Marginal Cost

Marginal Benefit

The additional satisfaction or value a consumer receives from consuming one more unit of a good or service.

Marginal Cost

The additional expense incurred by a producer to produce one more unit of a good or service.

Law of Demand

Willingness and ability of customers to pay a sum for a good/service at a given price/time.