Markets and equilibrium

Perfect competition is characterised by a large number of small firms, a homogeneous product, perfect knowledge and low barriers to entry.
Monopolistic competition includes many firms selling differentiated products, with some barriers to entry.
Oligopoly consists of a few firms dominating the market, selling either homogeneous or differentiated products, with high barriers to entry.
Monopoly is formed when one firm dominates the market due to high barriers to entry.

Demand is the willingness and ability of a consumer to buy a good or service at a given price over a given period.
Supply is the willingness and ability of a producer to provide a good or service at a given price over a given period.
Market equilibrium is attained when the quantity demanded equals the quantity supplied, meaning the market is cleared of all excesses.
Excess supply occurs when supply exceeds demand, leading to a surplus and downward pressure on prices.
Excess demand occurs when demand exceeds supply, creating a shortage and upward pressure on prices.

PED measures the responsiveness of demand following a change in price.
Price elastic goods have a PED greater than one, meaning that demand is highly responsive to changes in price.
Price inelastic goods have a PED less than one, meaning that demand is less responsive to price changes.
Unit elasticity is when the change in price leads to a proportionate change in demand (PED = 1).

PES measures the responsiveness of quantity supplied to changes in price.
If PES is greater than one, supply is regarded as elastic since a change in price leads to a more than proportionate change in quantity supplied.
If PES is less than one, supply is considered inelastic, as quantity supplied response less than proportionately to changes in price.

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
Producer surplus is the difference between what producers are willing to accept and the amount they actually receive.
Market equilibrium maximizes the total surplus in the market, proving the efficiency of market transactions.