Efficiency and Equity

These flashcards cover key concepts of efficiency and equity, focusing on definitions and principles related to allocative efficiency, consumer surplus, producer surplus, and market dynamics.

Allocative Efficiency

Resources are allocated efficiently when it is not possible to produce more of a good or service without giving up some other good or service that is valued more highly.

Marginal Benefit

The benefit a person receives from consuming one more unit of a good or service, measured by the euro (dollar, pound, etc) value of other goods and services that a person is willing to give up.

Decreasing Marginal Benefit

The principle stating that as more of a good or service is consumed, its marginal benefit decreases.

Marginal Cost

The opportunity cost of producing one more unit of a good or service.

Increasing Marginal Cost

The principle stating that as more of a good or service is produced, its marginal cost increases.

Consumer Surplus

The value of a good minus the price paid for it, summed over the quantity bought.

Producer Surplus

The price of a good minus the marginal cost of producing it, summed over the quantity sold.

Invisible Hand

Adam Smith’s concept that competitive markets send resources to their highest valued use in society.

Deadweight Loss

A decrease in consumer and producer surplus due to obstacles to efficiency, leading to underproduction or overproduction.

Consumer Surplus Calculation

Measured by the area under the demand curve and above the price paid, up to the quantity bought.

Producer Surplus Calculation

Measured by the area below the price and above the supply curve, up to the quantity sold.

Competitive Equilibrium Efficiency

A market creates an efficient allocation of resources at equilibrium where marginal social benefit equals marginal social cost.