IB Economics 2.3 Competitive Market Equilibrium Key Definitions

State of the economy in which the combination and quantity of goods and services produced is aligned with the preferences of consumers and producers, maximising social surplus.

The difference between the highest price consumers are willing and able to pay for a good or service and the actual price they end up paying.

The ability of prices, and changes in prices, to provide information to consumers and producers that encourages them to act in their own best interest.

The benefit gained from consuming an additional unit of a good or service

The cost of producing an additional unit of output

When quantity demanded is equal to quantity supplied, and there is no tendency for the price to change.

The difference between the price sellers receive and the lowest price that they are willing and able to accept.

Method to divide and apportion goods or services amongst consumers

Assigning available resources or factors of production to particular uses selected from various possible options.

The idea that available resources (land, labour, capital, entrepreneurship) are limited and unable to satisfy unlimited human needs and wants.

The excess of quantity demanded over quantity supplied.

The capacity of prices, and changes in prices, to convey information to consumers and producers about the existence of shortages or surpluses in markets, achieving an efficient allocation of resources.

The sum of consumer surplus and producer surplus. Maximised in the free market, when the market operates at its equilibrium point.

The extra supply that results when quantity supplied is greater than quantity demanded.

The reduction in social surplus that occurs when marginal social benefits (MSB) are not equal to marginal social costs (MSC), typically as a result of market failure.