ib econ key definitions

Microeconomics

the study of the behaviour of individual consumers, firms, and industries and the determination of market prices and quantities of good, services, and factors of production.

Macroeconomics

the study of aggregate economic activity. It investigates how the economy as a whole works.

Ceteris paribus

all other things being held equal.

Positive

can be proven to be right or wrong by looking at the facts.

Normative

based upon opinion and so are incapable of being proved to be right or wrong.

Scarcity

the limited availability of economic resources relative to society's unlimited demand for goods and services.

Land

the physical factor of production. It consists of natural resources, some of which are renewable (e.g. wheat) and some of which are non–renewable (e.g. iron ore).

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 comes from investment in physical capital and human capital. Physical capital is the stock of manufactured resources (e.g. factories, roads, tools) and human capital is the value of the workforce (improved through education or better health care).

Entrepreneurship

the factor of production involving organising and risk–taking.

Opportunity cost

it 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 are free goods. A free good has an unlimited supply at market price zero.

Economic good

a good or service which is relatively scarce and so has 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 possibilities curve*

it shows the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

Actual output

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

Actual growth

this occurs when previously unemployed factors of production are brought in to use. It is represented by a 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

this occurs when the quantity and/or quality of factors of production within an economy is increased. It is represented by an outward shift of the PPC.

Economic growth

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

Economic development

it is a broad concept involving improvement in standards of living, reduction in poverty, improved health and education. (May add increased freedom and economic choice.)

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 (market economy)

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

Planned economy (command economy)

an economy where the means of production are collectively owned (except labour). The state determines 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 the price of a good falls, the quantity demanded will normally increase.

Supply *

it is the willingness and ability of a producer to produce a quantity of a good or service at a given price (in a given time period).

Law of supply

as the price of a good rises, the quantity supplied will normally rise.

Equilibrium price*

it is the market–clearing price. It is set where D \= S.

Maximum price*

a price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Minimum price*

a price imposed by an authority and set above the market price. Prices cannot fall below this price.

Price elasticity of demand

a measure of the 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 greater than proportional change in the quantity demanded of the good or service. (PED would be greater than one.)

Inelastic demand

where a change in the price of a good or service leads to a less than proportional change in the quantity demanded of the good or service. (PED would be less than one.)

Income elasticity

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

Normal goods

A good where the demand for it increases as income increases.

Inferior goods

A good where the demand for it decreases as in come increases and more superior goods are purchased.

Price elasticity of supply

a 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 the price of a good or service leads to a greater than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)

Inelastic supply

where a change in the price of a good or service leads to a less than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)

Indirect tax

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

Flat rate tax (specific tax)

an indirect tax where a specific amount, e.g. $1, is added to the selling price of each unit.

Ad valorem

an indirect tax where a percentage, e.g. 20%, is added to the selling price of each unit.

Subsidy

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

Short run

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

Law of diminishing average returns

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

Long run

the period of time in which all factors of production are variable, but the state of technology is fixed – the planning stage.

Total revenue

the aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Average revenue

total revenue received divided by the number of units sold. Usually, price is equal to average revenue.

Marginal revenue

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

Normal profits

it is the amount of revenue needed to cover the total costs of production, including the opportunity costs.

Abnormal profits

a level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. (An amount of revenue greater than the total costs of production, including opportunity costs.)

Profit–maximising 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. The firm sells the last unit it produces at the amount that it cost to make it.

Productive efficiency*

it exists when production is achieved at lowest cost per unit of output. This is achieved at the point where average total cost is at its lowest value.

Perfect competition

it is a market structure where there are a very large number of small firms, producing identical products, that are incapable of affecting the market supply curve. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

Monopolistic competition

it is a market structure where there are many buyers and sellers, producing differentiated products, with no barriers to entry or exit.

Product differentiation

ways in which suppliers attempt to make their products different from those of their competitors, e.g. differences in quality, performance, design, styling, or packaging. It is a form of non–price competition.

Oligopoly

it is a market structure where there are a few large firms that dominate the market. There are many different theories of oligopoly.

Collusive oligopoly

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

Non–collusive oligopoly

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

Cartel

A group of firms in an industry that join together to fix prices. These are usually illegal in most countries,

Monopoly

a market form where there is only one firm in the industry, so the firm is the industry. Monopolies may, or may not, have barriers to entry.

Barriers to entry

obstacles in the way of potential newcomers to a market, such as economies of scale, product differentiation, and legal protection.

Natural monopoly

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

Contestable market

a market where new entrants face costs similar to those of established firms and where, on leaving, firms are able to get back their capital costs, less depreciation.

Price discrimination

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

Market failure

the failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.

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

it is the development needed to meet the needs of the present generation without compromising the ability of future generations to meet their own needs.

Public goods

goods or services which would not be provided at all by the market. They have the characteristics of non–rivalry and non–diminishability, e.g. flood barriers.

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 or 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. Firms may trade these permits for money.

Circular flow of income*

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

Gross national product

the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit).

Net national product

GNP [the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit)] minus depreciation (capital consumption).

Nominal GDP

the total money value of all final goods and services produced in an economy in one year, not adjusted for inflation.

Real GDP

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

Per capita GDP

the total money value of all final goods and services produced in an economy in one year per head of the population.

Economic growth

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

Economic development

it is a broad concept involving improvement in standards of living, reduction in poverty, improved health and education. (May add increased freedom and economic choice.)

Human development index [HDI]

a composite index that brings together measurements of health, education, and living standards in order to attempt to measure relative development. (Elements are life expectancy at birth, literacy rate, school enrolment rate, and GDP per capita [PPP US$])

Aggregate demand*

An explanation that aggregate demand is the total spending in an economy consisting of consumption, investment, government expenditure and net exports.

Consumption

An explanation that it is spending by households on consumer goods and services over a period of time.

Investment

An explanation that it is the addition of capital stock to the economy or expenditure by firms on capital.

Inflationary gap

the situation where total spending (aggregate demand) is less than the full employment level of output, thus causing inflation.

Deflationary gap

the situation where total spending (aggregate demand) is
greater than the full employment level of output, thus causing unemployment.

Business cycle* (trade cycle)

it shows fluctuations in the level of economic activity in an economy over time and suggests that the changes are cyclical. There are four stages, depression (slump), recovery, boom, and recession.

Demand–side policy

any government policy designed to influence the aggregate demand in the economy, thus affecting the average price level and real national output.

Fiscal policy

a demand–side policy using changes in government spending and/or direct taxation to achieve economic objectives relating to inflation and unemployment.

Monetary policy

a demand–side policy using changes in the money supply or interest rates to achieve economic objectives relating to inflation and unemployment.

Aggregate supply*

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

Short run aggregate supply (SRAS)

aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.

Long run aggregate supply (LRAS)

aggregate supply that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/or quality of factors of production.

Supply–side policy

government policies designed to shift the long run aggregate supply curve to the right, thus increasing potential output in the economy.