market (dis)equilibrium, price mechanism and market efficiency

market disequilibrium

exists at any price other than the equilibrium price. when the market is in disequilibrium, either excess demand or excess supply exists in the market. excess demand causes the price to rise until a new equilibrium is established. conversely, excess supply causes the market price to fall until equilibrium is achieved.

equilibrium price

the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

equilibrium quantity

the quantity bought and sold at the equilibrium price

social surplus

the sum of consumer surplus and producer surplus

deadweight loss (social welfare loss)

the total loss of producer and consumer surplus from underproduction or overproduction

allocative inefficiency

when resources are not used to produce the goods and services wanted by consumers; MB>MC or MC>MB

allocative efficiency

when the mix of goods being produced represents the mix that society most desires

shortage

a situation in which quantity demanded is greater than quantity supplied. [happens when the market is in disequilibrium.]

surplus

a situation in which quantity supplied is greater than quantity demanded. [happens when the market is in disequilibrium.]

market equilibrium

condition of price stability where the quantity demanded equals the quantity supplied

Explain the view that the best allocation of resources from society's point of view is at competitive market equilibrium, where social surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost).

At the point of competitive market equilibrium of a good/service, production of that good/service occurs at where the marginal benefit is equal to the marginal cost, and where the social surplus (the sum of consumer surplus and producer surplus) is at its maximum. At that point. the society produces the maximum amount of the good/service it requires at the lowest possible price. Thus the market has achieved allocative efficiency, and society is making the best possible use of its scarce resources. In competitive markets, the additional benefit of society getting one more good/service would be at the cost of society producing that one extra unit.

price as signals

the ability of prices, and changes in prices, to communicate information to consumers and producers, on the basis of which they make economic decisions.

price as incentives

the ability of prices, and changes in prices, to convey information to consumers and producers that motivates them to respond by offering them incentives to behave in their best-self-interest.

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

producer surplus

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives