Unit 6 AP Microeconomics Review

Social Efficiency

occurs where marginal social benefit equals marginal social cost

Marginal Social Benefit

total benefit to society from one more unit

Marginal Social Cost

total cost to society from one more unit

Perfect Competition Efficiency

price equals marginal cost leading to optimal allocation

Deadweight Loss

loss of total surplus when output is not at efficient level

Deadweight Loss Formula

one half times base times height

Externality

cost or benefit affecting a third party not in the transaction

Negative Externality

external cost causing overproduction

Positive Externality

external benefit causing underproduction

Marginal Private Cost

cost to producers of producing one more unit

Marginal Private Benefit

benefit to consumers of one more unit

Negative Externality Graph

marginal social cost above supply curve

Positive Externality Graph

marginal social benefit above demand curve

Tax on Negative Externality

shifts supply left and reduces quantity

Subsidy for Positive Externality

shifts supply right and increases quantity

Rival Good

one person consumption reduces availability for others

Excludable Good

people can be prevented from using it

Public Good

non rival and non excludable

Private Good

rival and excludable

Common Resource

rival but non excludable

Club Good

non rival but excludable

Free Rider Problem

people benefit without paying leading to underproduction

Tragedy of the Commons

overuse of shared resources

Government Intervention

policies to correct market failures

Tax Revenue Formula

tax per unit times quantity sold

Subsidy Cost

subsidy per unit times quantity sold

Consumer Surplus

difference between willingness to pay and price

Producer Surplus

difference between price and cost

Lorenz Curve

graph showing income distribution

Gini Coefficient

measure of income inequality from zero to one

Income Inequality

unequal distribution of income

Wealth Inequality

unequal distribution of assets

Cause of Inequality

differences in education and skills