Econ Modules 5a-6 Key Concepts and Definitions

productive efficiency

Producing output at the least possible cost, on the PPF.

allocative efficiency

Resources are devoted to their most valuable use; MB = P = MC.

productive efficiency

Producing output at the least possible cost, on the PPF.

allocative efficiency

Resources are devoted to their most valuable use; MB = P = MC.

market allocatively efficient

When marginal benefit equals marginal cost.

price floor

A government-set minimum price that may be charged in a market.

price ceiling

A government-set maximum price that may be charged in a market.

consumer surplus

The difference between what consumers are willing to pay and what they actually pay.

producer surplus

The difference between what producers are paid and their cost of production.

deadweight loss

The loss in total surplus due to inefficiency.

externality

A cost or benefit that affects someone outside the market.

positive externality

A benefit to others (e.g. vaccination, education).

negative externality

A harm to others (e.g. pollution, noise).

public good

A good that is non-excludable and non-rival (e.g. streetlights, national defense).

common resource

A good that is rival but non-excludable (e.g. fisheries, clean air).

market failure with externalities

Because MB != MC - external costs or benefits are ignored.

solution to a positive externality

Increase production via subsidies or public provision.

solution to a negative externality

Decrease production via taxes or regulation.

Coase Theorem

Externalities can be solved privately if property rights are clear, info is perfect, and transaction costs are low.

cap and trade

A market-based solution where firms buy/sell pollution permits under a government cap.

Lorenz Curve

The cumulative share of income by individuals or groups.

bowed Lorenz Curve

Greater income inequality.

Gini Coefficient

A numerical measure of income inequality (0 = perfect equality, 1 = perfect inequality).

change in U.S. Gini Coefficient from 1968 to 2010

0.359 (1968) to 0.457 (2010) -> more inequality.

common factors affecting poverty

Education, family structure, race/ethnicity, geography.

examples of anti-poverty programs

TANF, SNAP, Medicaid, Housing Assistance, EITC.

Earned Income Tax Credit (EITC)

A tax refund for low-income workers that reduces poverty.

utility

The satisfaction received from consuming a good or service.

total utility

The total satisfaction from all units consumed.

marginal utility

The extra satisfaction from one more unit.

Law of Diminishing Marginal Utility

As consumption increases, marginal utility decreases.

utility-maximizing rule

Spend where MU/P is equal across goods.

Paradox of Value

Water has high total utility but is cheap; diamonds have low total utility but are expensive due to high marginal utility.

behavioral economics

Traditional models ignore non-monetary costs, sunk costs, and overestimate self-control.