2.3 Competitive market equilibrium

• The market equilibrium is the point where the supply curve of a good or service crosses the demand curve. Demand and supply are balanced.
• The equilibrium price is the price at which quantity demanded of a good is equal to the quantity supplied, so that there are no surpluses or shortages of the good.
• Disequilibrium is a state where quantity demanded doesn't exactly equal quantity supplied, due to changes in the external environment (non-price determinants for demand and supply).
• Excess supply/Surplus is the quantity demanded of a good is less than the quantity supplied. It occurs when the price in the market is above the equilibrium price.
• Excess demand/Shortage is the quantity demanded of a good is more than the quantity supplied. It occurs when the price in the market is below the equilibrium price.
• Shifting the demand and supply curves produces a new market equilibrium.
• The price mechanism is the way in which price changes affect quantity demanded and quantity supplied, therefore determining resource allocation in a market.
• A feedback loop refers to interdependence between two or more components of a system where the change in the state of one component affects the other.
• Negative feedback loops help to stabilise systems after a disturbance. When there is a change in the system, they act to bring back equilibrium.
• Price changes create negative feedback in the market in two ways: signals and incentives.

  
• The signalling function of prices introduces negative feedback into the market system by communicating what consumers and producers should do. The feedback causes stakeholders to respond in a way that brings the market back into equilibrium, stabilising the system.
• The incentive function of prices introduces negative feedback into the market system by providing financial motivation to consumers and producers to react in a way that brings the market back into equilibrium, stabilising the system.
• Rationing refers to the controlled distribution of resources. It answers the economic question of 'for whom' t produce. It's necessary at any time when goods and resources are scarce.
• Consumer surplus is the difference between the price that consumers are willing to pay and the price they actually pay.

  
• Producer surplus is the difference between what producers are willing and able to sell and the price earned from selling the goods at the market price.

  
• Social/community surplus is the sum of consumer surplus and producer surplus. It's the total benefit gained by society when the market is at equilibrium.

  
• Social/community surplus is maximised at equilibrium.