Willingness to Pay (Reservation Price)
The maximum amount that a buyer would be willing to pay for a good or service
Willingness to Sell
The minimum price that a seller is willing to accept in exchange for a good or service
Surplus
A way of measuring who benefits from transactions, and by how much
Consumer Surplus
The net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price
Producer Surplus
The net benefit that a producer receives from the scale of a good or service, measured by the difference between the producer’s willingness to sell and the actual price
Total Surplus
A measure of the combined benefits that everyone receives from participating in an exchange of goods or services
Zero-Sum Game
A situation in which whenever one person gains, another loses an equal amount, such that the net value of any transaction is zero
Efficient Market
An arrangement such that no exchange can make anyone better off without someone becoming worse off
Deadweight Loss
A loss of total surplus that occurs because the quantity of a good that is bough and sold below the market equilibrium quantity
Market Failures
Situations in which the assumption of efficient, competitive market fails to hold
Price Control
A regulation that sets a maximum or minimum legal price for a particular good
Price Ceiling
A maximum legal price at which a good can be sold
Price Floor
A minimum legal price at which a good can be sold
Tax Wedge
The difference between the price paid by buyers and the price received by sellers in the presence of tax
Tax Incidence
The relative tax burden borne by buyers and sellers
Subsidy
A requirement that the government pay an extra amount to producers or consumers of a good
Utility
A measure of the amount of satisfaction a person derives from something
Revealed Preference
The idea that people’s preferences can be determined by observing their choices and behaviour
Utility Function
A formula for calculating the total utility that a particular person derives from consuming a combination of goods and services
Bundle
A unique combination of goods that a person could choose to consume
Marginal Utility
The change in total utility that comes from consuming one additional unit of a good or service
Diminishing Marginal Utility
The principle that the additional utility gained from consuming successive units of a good or service tends to be smaller than the utility gained from the previous unit
Budget Constraint
A line that shows all the possible combinations of goods that a consumer can buy within their budget
Income Effect
The change in consumption that results from increased effective wealth due to lower prices
