Market Efficiency and Supply Concepts

Consumer surplus is the difference between what a consumer is willing to pay for a good and what they actually pay.
Producer surplus is the difference between the price a producer receives for a good and the cost of producing it.
Market equilibrium is a state where the quantity supplied of a good equals the quantity demanded. At this point, there is no tendency for the price to change.
Pareto optimality is a state where it is impossible to make one person better off without making someone else worse off.

When the price of a good decreases, consumers will buy more of that good, substituting it for other goods.
This change in purchasing behaviour increases the consumer's real income (or purchasing power).

Supply is the quantity of goods a producer is willing and able to sell at a given price in a specific time period.
According to the law of supply, as the price of a commodity increases, producers expand their supply by offering more onto the market.
Conversely, as the price decreases, the supply decreases.

Changes to production costs can significantly affect supply. Increased production costs decrease supply, while decreased production costs increase supply.
Advancements in technology typically increase supply.
Changes in prices of other goods influence supply. For example, an increase in the price of beef may increase the supply of chicken.
Expectations of future events can affect supply. For example, an expectation of a major disruption could decrease supply.
Weather can have a significant impact on supply, particularly for agricultural products. Bad weather conditions usually decrease supply.
Taxes impact supply. Increased taxes (or increased costs) decrease supply.

Higher market prices incentivize producers to raise output because they stand to make a higher profit.

Price ceilings prevent a price from rising above a certain level.
When set below the equilibrium price, they can lead to shortages (quantity demanded exceeding quantity supplied).
Price ceilings can also lead to lower quality products, black markets, and non-price rationing.

Market disequilibrium occurs when the price is different from the equilibrium price.
Free competitive markets naturally work to eliminate disequilibrium by adjusting prices to reach equilibrium.

The price mechanism is determined by the forces of supply and demand in competitive markets.
Adam Smith, the father of modern economics, called this the "invisible hand of the market."
The price serves as a signal to both consumers and producers, indicating the relative scarcity of a good.

Rationing: Prices ration scarce resources when demand outstrips supply. Higher prices deter some consumers from purchasing the product.
Signaling: Rising prices due to stronger demand signal to suppliers to expand output.

Nudge is a technique designed to influence consumer choices in a predictable way without imposing sanctions or limiting choice.
Choice Architecture: Nudge theory seeks to modify choice architecture, the design of environments and the way options are presented, to nudge people towards certain decisions.
Types of nudges:
Default choice: The option chosen when the consumer does nothing.
Restricted choice: When the government limits choices.
Mandated choice: A free choice, but it is mandatory to make.

Standard economic decision-making models are based on the assumption of rational self-interest:
Consumers want to maximize their satisfaction.
Producers want to maximize their profit.
Workers want the highest possible wages.
Investors want the highest possible return on investment (ROI).

Allocative efficiency occurs when resources are allocated to the best interests of society, maximizing social welfare and utility.
It considers the effects of consuming one extra unit of a good or service.
Marginal benefits: The change in total private benefit from one extra unit.
Marginal cost: The change in total private cost from one extra unit.

Productive Efficiency: When resources are used to give the maximum possible output at the lowest possible cost.
Productive efficiency aims to maximize consumer welfare, but can be wasteful if goods and services consumers want are not produced.

The 'invisible hand' is a metaphor for the forces that drive the free market economy.
Adam Smith's economic theory states that free markets, guided by self-interest, are the most efficient way to allocate resources.

Total utility is the total satisfaction a consumer receives from consuming all units of a good.
Marginal utility is the additional satisfaction a consumer gets from consuming one more unit of a good.

As consumption of a good increases, marginal utility decreases with each additional unit consumed.
Consumers are only willing to buy more of a good if its price falls.

Allocative efficiency: Is not achieved when a price floor is established.
Price floor: Leads to excess supply and decreased consumer surplus.
Nudge Theory: A flexible way to understand human behaviour and decision-making. Nudge theory can be used to manage change and identify unhelpful influences on people.