Glossary
Allocative Efficiency
A state where resources are distributed to produce the goods and services that society values most, meaning the marginal benefit equals the marginal cost.
Example:
A city achieves Allocative Efficiency in its public transportation system when the number of buses and routes perfectly matches the commuters' needs, minimizing wasted resources and maximizing convenience.
Consumer Surplus
The monetary benefit consumers receive when they pay a price for a good or service that is less than the maximum price they were willing to pay.
Example:
If you were willing to pay 400, your Consumer Surplus is $100.
Equilibrium Price
The specific price at which the quantity demanded equals the quantity supplied in a market, clearing the market of surpluses or shortages.
Example:
If the demand for artisanal bread meets the supply at 5 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:
At the Equilibrium Price of $5 per loaf, if 100 loaves of artisanal bread are sold, then 100 loaves is the Equilibrium Quantity.
Individual Consumer Surplus
The difference between the maximum price a single consumer is willing to pay for a good and the actual market price they pay.
Example:
A student willing to pay 15 for it experiences an Individual Consumer Surplus of $5.
Individual Producer Surplus
The difference between the market price a producer receives for a good and the minimum price they were willing to accept for it.
Example:
A farmer willing to sell a bushel of corn for 5 earns an Individual Producer Surplus of $2.
Market Equilibrium
The point where the quantity of a good or service that producers are willing to supply exactly matches the quantity that consumers are willing to buy, resulting in a balanced market.
Example:
When the price of a popular video game settles at a level where every copy produced is sold and every gamer who wants one at that price can get it, the market is in Market Equilibrium.
Producer Surplus
The monetary benefit producers receive when they sell a good or service for a price that is higher than the minimum price they were willing to accept.
Example:
If a baker was willing to sell a cake for 35, their Producer Surplus is $15.
Total Consumer Surplus
The sum of all individual consumer surpluses in a market, graphically represented as the area below the demand curve and above the equilibrium price.
Example:
If all concert-goers collectively saved $10,000 by paying less than their maximum willingness to pay for tickets, that represents the Total Consumer Surplus for that event.
Total Economic Surplus
The sum of consumer surplus and producer surplus, representing the overall welfare or benefit to society from market transactions.
Example:
At the market equilibrium for organic vegetables, the combined benefits to both buyers (who paid less than they were willing) and sellers (who received more than they needed) constitute the Total Economic Surplus.
Total Producer Surplus
The sum of all individual producer surpluses in a market, graphically represented as the area above the supply curve and below the equilibrium price.
Example:
When all local artists at a craft fair collectively earn $5,000 more than their minimum acceptable prices for their artwork, that's the Total Producer Surplus for the fair.
Voluntary Exchange
A transaction in which both the buyer and seller freely agree to trade, believing they will benefit from the exchange.
Example:
When you buy a concert ticket, both you and the ticket seller engage in Voluntary Exchange, as you gain entertainment and they gain revenue.