competitive equilibrium model  a model that assumes utility maximization on the part of consumers and profit maximization on the part of firms, along with competitive markets and freely determined prices.
consumer surplus  the difference between what a person is willing to pay for an additional unit of a good—the marginal benefit—and the market price of the good; for the market as a whole, it is the sum of all the individual consumer surpluses, or the area below the market demand curve and above the market price.
deadweight loss  the loss in producer and consumer surplus due to an inefficient level of production.
double-auction market  a market in which several buyers and several sellers state prices at which they are willing to buy or sell a good.
equilibrium price  the price at which quantity supplied equals quantity demanded.
first theorem of welfare economics  the conclusion that a competitive market results in an efficient outcome; sometimes called the "invisible hand theorem"; the definition of efficiency used in the theorem is Pareto efficiency.
income inequality  disparity in levels of income among individuals in the economy.
invisible hand  the idea that the free interaction of people in a market economy leads to a desirable social outcome; the term was coined by Adam Smith.
Pareto efficient  a situation in which it is not possible to make someone better off without making someone else worse off.
producer surplus  the difference between the price received by a firm for an additional item sold and the marginal cost of the item’s production; for the market as a whole, it is the sum of all the individual firms’ producer surpluses, or the area above the market supply curve and below the market price.
surplus  the situation in which quantity supplied is greater than quantity demanded.