Economics: Market Efficiency, Taxation, and International Trade

Vocabulary flashcards covering welfare economics, consumer and producer surplus, market efficiency, deadweight loss and tax revenue, the Laffer curve, and the economic effects of international trade and tariffs.

Welfare Economics

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

Allocation of Resources

The framework determining how much of each good is produced, which producers produce it, and which consumers consume it.

Willingness to Pay (WTP)

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

Marginal Buyer

The buyer who would leave the market if the price were any higher.

Consumer Surplus (CS)

A measure of the economic benefit consumers receive from participating in a market, defined as willingness to pay minus the price paid ($\text{CS} = \text{WTP} - \text{Price}$), or the area under the demand curve above the price.

Marginal Seller

The seller who would leave the market if the price were any lower.

Producer Surplus (PS)

A measure of the economic benefit producers receive from participating in a market, defined as price received minus cost ($\text{PS} = \text{Price} - \text{Cost}$), or the area below the price and above the supply curve.

Total Surplus

The total gains from trade in a market, calculated as the sum of consumer surplus and producer surplus ($\text{Total Surplus} = \text{CS} + \text{PS}$).

Efficiency

The state of resource allocation in which total surplus is maximized, goods are consumed by buyers who value them most, and goods are produced by sellers with the lowest costs.

Tax Wedge

The gap driven by a tax between the price buyers pay and the price sellers receive, which lowers quantity bought and sold regardless of which party is taxed.

Deadweight Loss (DWL)

The reduction in total surplus that results from a market distortion (such as a tax) that prevents buyers and sellers from realizing mutually advantageous gains from trade.

Regressive Tax

A tax that takes a larger percentage of income from individuals with lower incomes, often hitting low-income households hardest when placed on necessities.

Laffer Curve

A curve depicting the relationship between tax size and tax revenue, showing that tax revenue rises with the tax rate up to an optimal point, after which higher taxes cause revenue to decline.

Supply-Side Economics

An economic theory associated with Reaganomics proposing that lower tax rates encourage work, saving, and investment, thereby stimulating faster economic growth.

World Price

The prevailing price of a good in the world market; if a country's domestic price is lower than the world price, it exports the good, and if domestic price is higher, it imports the good.

Tariff

A tax on imported goods that raises domestic prices, reduces import volume, moves the domestic market closer to equilibrium without trade, and creates a deadweight loss.

Multilateral Trade Agreements

Trade pacts formed among multiple nations to simultaneously reduce tariffs and blunt domestic political pressure for protectionism.