Glossary
Allocatively Efficient
A state where resources are distributed in a way that maximizes overall societal welfare, meaning goods and services are produced in the quantities most desired by society.
Example:
If a city builds exactly the right number of public parks that citizens want, not too many or too few, then resources are being used in an Allocatively Efficient way.
Consumer Surplus
The difference between the maximum price a consumer is willing to pay for a good and the actual price they pay, representing the benefit consumers receive.
Example:
If you were willing to pay 30, you gained $20 in Consumer Surplus.
Determinants of Demand
Non-price factors that cause the entire demand curve to shift, such as changes in consumer income, tastes, expectations, or the prices of related goods.
Example:
A sudden trend for vintage clothing would be a Determinant of Demand that shifts the demand curve for such items to the right.
Determinants of Supply
Non-price factors that cause the entire supply curve to shift, such as changes in input costs, technology, government policies, or the number of sellers.
Example:
A new, more efficient robot in a car factory would be a Determinant of Supply that shifts the supply curve for cars to the right.
Equilibrium Price
The specific price at which the quantity demanded by consumers exactly equals the quantity supplied by producers, clearing the market.
Example:
If coffee shops sell lattes for 4 is the Equilibrium Price.
Equilibrium Quantity
The specific quantity of a good or service that is both demanded and supplied at the equilibrium price.
Example:
If 500 lattes are sold daily at the equilibrium price of $4, then 500 lattes is the Equilibrium Quantity.
Market Disequilibrium
A state in a market where the quantity supplied does not equal the quantity demanded, leading to either a surplus or a shortage.
Example:
If the government sets a price ceiling on rent that is too low, it can create Market Disequilibrium in the housing market.
Market Equilibrium
The point where quantity supplied equals quantity demanded, representing a state of balance in the market.
Example:
When the price of a new video game is set just right, so that every copy produced is sold and every gamer who wants one at that price gets it, the market is in Market Equilibrium.
Producer Surplus
The difference between the price a producer receives for a good and the minimum price they would have been willing to accept to supply it, representing the benefit producers receive.
Example:
A baker was willing to sell a cake for 25, so the baker earned $5 in Producer Surplus.
Shortage
A situation where the quantity demanded of a good or service exceeds the quantity supplied at a given price, often leading to upward pressure on prices.
Example:
When a new gaming console is released and stores quickly run out because more people want to buy it than are available, there is a Shortage.
Surplus
A situation where the quantity supplied of a good or service exceeds the quantity demanded at a given price, often leading to downward pressure on prices.
Example:
If a toy company produces 10,000 action figures but only 7,000 are sold at the current price, there is a Surplus of 3,000 action figures.
Voluntary Exchange
A transaction where both the buyer and seller willingly participate because they expect to benefit from the trade, maximizing their utility and profits.
Example:
When you buy a concert ticket, you value the experience more than the money you pay, and the seller values the money more than the ticket, making it a Voluntary Exchange.