AP Econ Unit 3

Vocabulary flashcards covering chapters on consumer/producer surplus, market efficiency, taxation costs, deadweight loss, and international trade policies.

Welfare Economics

The study of how the allocation of resources affects economic well-being.

Willingness to Pay

The maximum amount that a buyer will pay for a good.

Consumer Surplus

A buyer’s willingness to pay minus the amount the buyer actually pays.

Cost

The value of everything a seller must give up to produce a good.

Producer Surplus

The amount a seller is paid for a good minus the seller’s cost.

Total Surplus

The sum of consumer surplus and producer surplus, calculated as the total value to buyers minus the total costs of sellers.

Efficiency

The property of a resource allocation of maximizing the total surplus received by all members of society.

Equity

The fairness of the distribution of well-being among the members of society.

Tax Wedge Diagram

A graphical representation showing the tax wedge created between the price buyers pay and the price sellers receive, resulting in tax revenue equal to tax size times quantity sold.

Deadweight Loss

The fall in total surplus that results from a market distortion, such as a tax.

Henry George's Land Tax Proposal

A 19th-century proposal for a single tax on raw land, which results in zero deadweight loss because the supply of land is completely fixed (price elasticity of supply equals zero).

World Price

The price of a good that prevails in the world market for that good.

Importing Country Welfare Diagram

Diagram depicting welfare changes in an importing nation where consumer surplus expands to A + B + D, producer surplus falls to C, and total surplus increases by area D.

Tariff

A tax on goods produced abroad and sold domestically.

Tariff Welfare Effects Diagram

Diagram illustrating the impact of a tariff, where consumer surplus decreases to A + B, producer surplus rises to C + G, government revenue equals E, and deadweight loss is D + F.

Import Quota

A limit on the quantity of a good that can be produced abroad and sold domestically.

Import Quota Welfare Effects Diagram

Diagram showing how an import quota raises domestic price, yielding license-holder surplus of E' + E'', consumer surplus of A + B, producer surplus of C + G, and deadweight loss of D + F.

Jobs Argument

An argument for trade restrictions claiming that foreign imports destroy domestic jobs, though free trade simultaneously creates new jobs in comparative advantage industries.

National-Security Argument

An argument for restricting trade to safeguard domestic industries essential for national defense.

Infant-Industry Argument

An argument for temporarily protecting emerging domestic industries from foreign competition until they become mature and established.

Unfair-Competition Argument

An argument that trade restrictions are necessary if foreign firms face fewer regulations or receive foreign government subsidies.

Protection-As-A-Bargaining-Chip Argument

The strategy of threatening trade restrictions to induce foreign governments to remove their own protectionist barriers.

If the world price is greater than the domestic price

They should export steel

If the world price is lower than the domestic price

They should import steel

domestic price

represents the opportunity cost of producing steel

world price

represents the opportunity cost of producing steel abroad

When a country exports a good

Domestic producers are better off and domestic consumers are worse off.

Total surplus is increased and the economic well-being of the country rises.