IB Economics HL

Ceteris paribus

all other things are being held equal

positive economics

matters of economics that can be proven to be right or wrong by looking at the facts

normative economics

matters of economics that are based upon opinion and so are incapable of being proven to be right or wrong

scarcity

the limited availability of economic resources relative to societys unlimited demand for goods and services

land

the physical factor of production. It consists of natural resources

labour

the human factor of production. It is the physical and mental contribution of the existing work force to production

capital

the factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment

entrepreneurship

the factor of production involving organizing and risk-taking

opportunity cost

is the next best alternative foregone when an economic decision is made

free good

goods or services which are unlimited in supply and have no opportunity cost. the have unlimited supply at market price zero

economic good

a good or services which is relatively scarce and so have a price. An opportunity cost is involved if it is consumed.

utility

the satisfaction or pleasure that an individual derives from the consumption of a good or service

production possibility curve

shows the maximum combination of outputs that can be production by an economy in a given time period

actual output

the actual production of goods and services in an economy over a given time period

actual growth

occurs when previously unemployed factors are put into production. It is represented by an movement from a point within a PPC to a new point nearer to the PPC

Potential output

the possible production that would be possible in an economy if all available factors were being employed.

Potential growth

occurs when the quantity/quality of factors of production within an economy is increased. It is presented with an outward shift of the PPC.

Economic growth

the growth of real output in an economy over time. Usually measured in real GDP

economic development

a broad concept which involves improvement in standard of living, reducing in poverty, improved health and education.

sustainable development

development that meets the needs of the present without compromising the ability of future generations to meet their own needs

free market economy

an economy where the means of production are privetly held by individuals and firms. Demand and supply determine how much to produce, how/how many to produce, an for whom to produce.

planned economy

an economy where the means of production are owned by the state. The state determines how much to produce how much to produce, how/how many to produce, and for whom to produce.

Transition economy

an economy in the process of moving from a centrally planned economic system towards a more market-oriented economic system.

demand

the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period

law of demand

as a price of a good falls, quantity demanded increases

velben goods

goods that are the exceptions to the law of demand, where at high prices, as price increases, then so does the demand

giffen goods

goods that are exceptions to the law of demand where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand

supply

the willigness and ability of a producer to produce a good or service at a given price

law of supply

as the price of a good rises the quantity supplied rises

maximum price

a price imposed by the authority and set below the market price

minimum price

a price imposed by the authority and set above the market price

buffer stock scheme

a situation where a government intervenes in a market to stabilize prices by buying up surplus stock when prices would go too low or by supplying stock from a previously built up 'buffer stock' when prices would go too high

price elasticity of demand

a measure of responsiveness of the quantity demanded of a good or service when there is a change in its price

elastic demand

where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded

inelastic demand

where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded

cross price elasticity

measure of the responsiveness of the demand for one good or service to a change in price for another good or service

income elasticity

measure of the responsiveness of demand for a good or service to a change in income

normal goods

a good where the demand increases as income increases

inferior goods

a good where the demand for it decreases as income increases

price elasticity of supply

measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price

elastic supply

where a change in price of a good or service leads to a proportionately larger change in the quantity supplied

inelastic supply

where a change in price of a good or service leads to a proportionately smaller change in the quantity supplied

indirect tax

tax on expenditure. It is added to the selling price of a good or service

flat rate tax

an indirect tax where a specific amount is added to the selling price of each unit

ad valorem tax

an indirect tax where a percentage is added to the selling price of each unit

subsidy

an amount paid by the government to a firm per unit of output

fixed costs

costs that do not change with the level of output.

variable costs

costs that vary with the level of output

total costs

fixed costs plus variable costs

average cost

total cost/quantity produced. the ____cost of production per unit

marginal cost

additional cost of producing one more unit of output

economic cost

the total cost of production, including opportunity cost

short run

the period of time in which at least one factor of production is fixed

law of diminishing average returns

as extra units of variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish

law of diminishing marginal returns

as extra units of a marginal factor are applied to a fixed factor, the output from each extra unit of marginal factor will eventually diminish

long run

the period of time in which all factors of production are variable

economies of scale

they are a fall in long run unit average costs that come about as a result of a firm increasing its scale of production

diseconomies of scale

they are an increase in long run unit average costs that come about as a result of a firm increasing its scale of production

total revenue

the aggregate revenue gained by a firm from the sale of a particular quantity of output

average revenue

total revenue received divided by the number of units sold

marginal revenue

the extra revenue gained from selling one more unit of a good or service

normal profits

the amount of revenue needed to cover the total costs of production including opportunity cost

abnormal profits

the level of profit that is greater than the total costs of production including opportunity cost

profit maximizing level of output

the level of output where marginal revenue is equal to marginal cost

shut down price

the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run

break even price

the price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run

allocative efficiency

the level of output where marginal cost is equal to average revenue.

productive efficiency

when production is achieved at lowest cost per unit of output

perfect competition

market structure where there are a very large number of small firms, homogeneous goods, price takers, no barriers and perfect knowledge

monopolistic competition

market structure where that are many buyers and sellers, producing differentiated products, no barriers

oligopoly

market structure where there are few large firms that dominate the market. Many different prices or output

collusive oligopoly

where a few firms in a oligopoly act together to avoid competition by resorting to agreements to fix prices or output

non-collusive oligopoly

where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price.

cartel

a group of firms in an industry that join together to fix prices.

monopoly

a market form where there is only one firm in the industry

natural monopoly

a situation where there are only enough economies of scale available in a market to support one firm

contestable market

a market that appears to be an oligopoly or monopoly, where the threat of potential competition forces firms to behave in a more competitive manner than theory would predict

price discrimination

it occurs when a producer charges different prices to different customers for an identical good or service

market failure

the failure of markets to produce at the socially efficient level of output

positive externalities

they are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed

negative externalities

they are the 'bad' effects that are suffered by a third party when a good or service is produced or consumed

sustainable development

development that meet the needs of the present generation without compromising the ability of future generations to meet their own needs

public good

goods and services which would not be provided at all by the market - non-rivalry and non-diminishability

merit goods

goods or services considered to be beneficial for people that would be under-provided by the market and so under-consumed

demerit goods

goods and services considered to be harmful to people that would be over-provided by the market and so over-consumed.

tradable permits

they are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable.

circular flow of income

a simplified model of the economy that shows the flow of money through the economy

real gdp

the total money value of all final goods and services produced in an economy in one year, adjusted to inflation

aggregate demand

the total spending in an economy consisting of consumption, investment, government expenditure and net exports

consumption

spending by households on consumer goods and services

investment

the addition of capital stock to the economy or expenditure by firms on capital

inflationary gap

the situation where the equilibrium level of output is greater than the full employment level of output

deflationary gap

the situation where the equilibrium level of output is less than the full employment level of output, thus causing unemployment

fiscal policy

a policy using government spending and/or direct taxation to achieve economic objectives

monetary policy

a policy using changes to money supply or interest rates to achieve economic objectives

aggregate supply

the total amount of domestic goods and services supplied by businesses and the government, including both consumer and capital goods

multiplier

the ratio of an included change in the level of national income to an original change in one or more of the injections into the circular flow of income

accelerator

the relationship between the level o induced investment and the rate of change of national income

crowding out

a situation where the government spends more than it receives and needs to borrow money, forcing up interest rates and pushing private investment and private consumption.

unemployment

the number of people without a job, who are actively seeking work