4. Market Equilibrium Analysis Flashcards
Aggregate Demand / Supply
The aggregate demand/supply represents the horizontal sum of the individual curves.
Excess Supply
A situation where the quantity supplied is larger than the quantity demanded.
Excess Demand
A situation where the quantity demanded is larger than the quantity supplied.
Equilibrium Price (Quantity)
Quantity Supplied = Quantity Demanded
Reservation price of a buyer/ seller
Seller —lowest price they are willing to accept for a given good / Buyer— highest price they are willing to pay
Rationing Rule
Buyers who value the good more will be the first to buy it
Consumer Surplus
The difference between what a consumer pays and what she is willing to pay (her reservation price)
Producer Surplus
The difference between the price a seller receives and what he is willing to receive. (her reservation price)
Total Consumer Surplus
The sum of the economic surplus of all consumers.
Total Producer Surplus
The sum of the economic surplus of all producers.
Total Surplus
The sum of total consumer and producer surplus.
Pareto Efficiency (short-run)
a situation in which it is impossible to make any individual better off without making at least one other individual worse off.
Pareto Improving Transaction
a transaction where all parties involved are better off
The Invisible Hand Principle (long-run)
individuals’ independent efforts to maximise their gains (profits for sellers; utility for buyers) will generally be beneficial for society and result in the socially optimal allocation of resources.
Deadweight Loss
A deadweight loss is a cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
