Economic Definitions Microeconomics IB

A comprehensive vocabulary flashcard set defining key economics terms across microeconomics, macroeconomics, behavioral economics, and market structures.

Adverse selection

This occurs when a buyer and seller do not have the same information, causing a transaction to take place based upon uneven terms.

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. The socially optimum level of output.

Allocative inefficiency

This occurs where the marginal social cost of producing a good is not equal to the marginal social benefit of the good to society. In different words, it occurs where the marginal cost of producing a good (including any external costs) is not equal to the price that is charged to consumers.

Anchoring

Anchors are mental reference points, relating to ideas or values, which are used to make decisions. Value is often set by anchors or imprints in our minds that we then use as mental reference points when making decisions. When an idea or a value is firmly anchored in a person’s mind, it can lead to automatic decisions and behaviours.

Anti-monopoly regulation

Policies that are intended to regulate the market share of an individual company in order to enforce competition

Asymmetric information

This is where one party in an economic transaction has access to more or better information than the other party.

Behavioural economics

This is a branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by economic actors. It challenges the assumption that actors will always make rational choices with the aim of maximising utility.

Bounded rationality

This suggests that most consumers and businesses do not have enough information to make fully-informed choices and so opt to satisfice, rather than maximise their utility.

Bounded self-control

In reality, consumers are often not rational in their self-control and do not stop consuming, even when it is sensible to stop. They consume even though the price of the good or service is greater than the marginal utility they gain from consumption.

Bounded selfishness

Concern for the well-being of others.

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).

Carbon (emissions) taxes

Taxes levied on the carbon contents of fuel.

Central bank

The government’s bank. The institution that is responsible for an economy’s monetary policy.

Ceteris paribus

A Latin expression meaning “other things being equal”.

Choice architecture

Choice architecture suggests that the decisions that we make are affected by the layout, sequencing, and range of choices that are available.

Circular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

Coase theorem

This theorem states that when an externality is created and there is a conflict due to assigned property rights, the two parties can bargain with each other to reach an efficient outcome regardless of who actually has the initial property rights. In this theorem, it is assumed that there are no costs associated with the bargaining that takes place between the two parties.

Collusive oligopoly

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

Common access resources

Common access resources are natural resources over which there is no established private ownership—they are non-excludable, but rivalrous.

Competitive supply

This exists where products are produced by the same factors of production, and so compete for these resources for their production.

Complements

Goods are used in combination with each other. For example, digital cameras and memory cards.

Concentration ratios

Functions showing the percentage of market share (or output) held by the largest X firms in an industry, expressed in the form CRX, where X represents the number of the largest firms. Most commonly, it is expressed as CR4.

Consumer nudges

Positive reinforcement and indirect suggestions used to influence the behaviour and decision making of consumers.

Consumer surplus

The additional benefit/utility received by consumers by paying a price that is lower than they are willing to pay.

Consumption (C)

Spending by households on consumer goods and services over a period of time.

Corporate social responsibility

An approach taken by firms where they attempt to produce responsibly/ethically towards the community and environment, demonstrating a positive impact on society.

Credit creation

The ability of commercial banks to expand the deposits of money that they receive by lending multiples of the amount, thus increasing the overall money supply.

Default choices

This is when consumers are automatically enrolled in a system, so that the consumer will “make” this choice if he/she takes no action.

Demand

The willingness and ability of consumers to purchase a quantity of a good or service.

Demand curve

This shows the relationship between the price of a good or service and the quantity demanded. It is normally downward sloping.

Demerit goods

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

Economics

“Economics is the science that studies human behaviour as a relationship between ends and scarce resources which have alternative uses”. Lionel Robbins (1932)

Economies of scale

Unit cost advantages that a business may experience as an outcome of increasing its scale of operations.

Efficiency

Efficiency is a quantifiable concept, determined by the ratio of useful output to total input.

Elasticity

A measure of the responsiveness of something to a change in one of its determinants.

Elasticity of demand for exports

A measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.

Elasticity of demand for imports

A measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.

Engel curve

A curve showing the relationship between income and quantity demanded.

Entrepreneurship

The factor of production involving organising and risk-taking.

Equilibrium

A state of rest, self-perpetuating in the absence of any outside disturbance.

Equity

The concept or idea of fairness.

Excess demand

This occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.

Excess supply

This occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.

Externalities

External costs or benefits to a third party, when a good or service is produced or consumed.

Factors of production

The four resources that allow an economy to produce its output: land, labour, capital and entrepreneurship (management).

Firms

Firms represent the productive units in the economy that turn the factors of production into goods and services.

Framing

This is the way that choices are described and presented. Changing the framing of a choice may affect tastes and preferences.

Free goods

The few things, such as air and salt water, that are not limited in supply (relatively scarce) and so do not have an opportunity cost.

Free market economy

An economy where the means of production are privately held by individuals and firms. Demand and supply (market forces) determine what/how much to produce, how to produce, and for whom to produce.

Free rider problem

This occurs when people who benefit from consuming resources, goods, or services do not have to pay for them, which results in overconsumption.

Imperfect competition

A market structure showing some, but not all, features of perfect competition.

Imperfect information

This exists where some stakeholders in an economic transaction have more access to knowledge than others.

Incentive effect

Prices give producers the incentive to either increase or decrease the quantity that they supply. A rising price gives producers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues.

Income effect

When a decrease in the price of a good or service that is being consumed means that consumers experience an increase in real income, usually allowing them to purchase more of the product. The income effect may be negative.

Income elasticity of demand (YED)

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

Indirect taxes

These are taxes on expenditure. They are added to the selling price of a good or service.

Inferior goods

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

Infrastructure

The large-scale capital usually provided by the government that is necessary for economic activity to take place.

Interest rate

The price of credit/borrowed money.

Joint supply

Goods which are produced together, or where the production of one good involves the production of another product (for example, as a by-product of production).

Labour

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

Laissez faire

The view that markets should be left alone, with minimal intervention by the government.

Land

The physical factor of production. It consists of natural resources, some of which are renewable (for example, wheat) and some of which are non-renewable (for example, iron ore).

Law of demand

As the price of a good falls, the quantity demanded will normally increase.

Law of supply

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

Mandated choices

Mandated choices are when consumers are required to state whether or not they wish to take part in an action.

Manufactured goods

Goods that have been processed by workers.

Marginal costs

Marginal costs are the additional costs of producing one more unit of output.

Marginal social benefit (MSB)

The extra benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.

Marginal social cost (MSC)

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Marginal utility

The extra utility derived from consuming one more unit of a good or service.

Market

A market is where buyers and sellers come together to carry out an economic transaction.

Market demand

The horizontal sum of the individual demand curves for a product of all the consumers in a market.

Market equilibrium

The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply.

Market failure

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

Market mechanism

This is the system in which the forces of demand and supply determine the prices of products. Also known as the price mechanism.

Market power

The ability of a firm (or group of firms) to raise and maintain prices above the level that would prevail under perfect competition.

Market supply

The horizontal sum of the individual supply curves for a product of all the producers in a market.

Merit goods

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

Microeconomics

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

Mixed economy

An economy that has elements of planning and elements of the free market. In reality, all economies are mixed. What is different is the degree of the mix from country to country.

Monopolistic competition

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

Monopoly

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

Moral hazard

This occurs when a party provides misleading information and changes behaviour after a transaction has taken place.

Necessity goods

A good where the demand for it increases as income increases, but the increase in demand is less than proportional to the rise in income.

Negative externalities of consumption

They are the negative effects that are suffered by a third party when a good or service is consumed.

Negative externalities of production

They are the negative effects that are suffered by a third party when a good or service is produced.

Non-collusive oligopoly

This is 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.

Non-excludable

Non-excludability exists when it is impossible to prevent a person, or persons, from consuming a good or service.

Normal goods

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

Normative economics

This deals with areas of the subject that are open to personal opinion and belief.

Nudge theory

This is generally used to describe situations where nudges (prompts, hints) are used to improve the life and wellbeing of people and society.

Oligopoly

A market structure where there are a few large firms that dominate the market.

Opportunity cost

The next best alternative foregone when an economic decision is made.

Perfect competition

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.

Perfect information

This exists where all stakeholders in an economic transaction have access to the same knowledge.

Perfectly elastic demand

This is where an increase in the price of a good or service leads to a fall in the quantity demanded of the good or service to zero. (PED would be infinity.)

Perfectly elastic supply

This is where a fall in the price of a good or service leads to a fall in the quantity supplied of the good or service to zero. (PES would be infinity.)

Perfectly inelastic demand

This is where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED would be equal to zero.)

Perfectly inelastic supply

This where a change in the price of a good or service leads to no change in the quantity supplied of the good or service. (PES would be equal to zero.)