IB ECON HL - 2.3 Competitive Market Equilibrium

point where the supply curve of a good or service crosses the demand curve, at the price where the quantity demanded equals the quantity supplied

market-clearing price, the price at which the quantity demanded of a good is equal to the quantity supplied

• Excess supply

• When quantity demanded of a good is less than the quantity supplied; occurs when the price in the market is above the equilibrium price.

• Excess Demand

• When the quantity demanded of a good is more than the quantity supplied; occurs when the price in the market is below the equilibrium price

way in which price changes affect quantity demanded and quantity supplied, thus determining resource allocation in a market.

• Signalling (WHAT) - Rising prices signal to consumers to consume less and producers to produce more

• Incentive (HOW) - Rising prices motivate rational producers and consumers to reallocate resources away (consumers) and towards (producers)

• Rationing (WHO) - Rising prices causes not everyone to be able to buy goods (determining who), willing AND able to

• Improved resource use, firms produce same good with lesser resources

• Producing optimal combination from society’s POV, achieved when economy allocates resources so that no one is better off without making someone worse of

• Consumer surplus - difference between highest price consumers are willing and able to pay for a good and the actual price they pay, extra benefit

• Producer surplus - difference between lowest price producers are willing and able to offer the good and actual price received, extra benefit

• Community Surplus - sum of consumer and producer surplus, total benefit gained by society when the market is in equilibrium

Consumer and Producer Surplus

• Area of triangle = 0.5 x base x height

Community Surplus

• Consumer surplus + Producer surplus