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Where does the peninsula end and the south bay begin? This has always been a bit blurry to me.

It's generally considered to be where San Mateo county ends and Santa Clara county begins, in other words, between Palo Alto and Mountain View.

Palo Alto is in Santa Clara County.

Any line is somewhat arbitrary, of course, but I would put it between Mountain View and Sunnyvale.

I think most people would encounter those terms while browsing http://sfbay.craigslist.org/search/pen/apa and http://sfbay.craigslist.org/search/sby/apa and the border seems to be the 85 freeway.