IB ECONOMICS U1 KEY TERMS

REFERENCE BOOK: Economics for the IB Diploma 3rd Edition by Ellie Tragakes

Change

Refers to the concept that economics is constantly evolving and dynamic, driven by shifts in factors such as technology, policies, preferences, and resources.

Choice

The act of selecting among alternatives due to the existence of scarcity and the necessity of making decisions on resource allocation.

Economic Wellbeing

A state in which individuals or societies experience prosperity, stability, and a high standard of living.

Equality

The state of being equal in status, rights, and opportunities, often related to equitable distribution of wealth and resources in economics.

Efficiency

The optimal allocation of resources to maximize output or achieve a desired outcome without waste.

Interdependence

The mutual reliance between different sectors, individuals, or countries, where each depends on others for goods, services, and resources.

Intervention

Actions taken by a government or authority to influence or directly manage economic activities, markets, or outcomes.

Sustainability

The ability to meet present needs without compromising the ability of future generations to meet their own needs, particularly concerning the use of natural resources.

Scarcity

The fundamental economic problem of having limited resources to satisfy unlimited wants and needs.

Factors of Production

The inputs used in the production of goods and services: land, labor, capital, and entrepreneurship.

Rationing

The controlled distribution of scarce resources, goods, or services.

Price rationing

A market mechanism where the allocation of scarce resources is determined by price, often leading to a higher price when demand exceeds supply.

Non-price rationing

Distribution methods based on criteria other than price, such as queuing, lotteries, or government allocation.

Market economy

An economic system where decisions on production, investment, and distribution are driven by supply and demand, with minimal government intervention.

Command economy

An economic system where the government or a central authority makes all decisions about the production and distribution of goods and services.

Mixed economy

An economic system combining elements of both market and command economies, where both the government and private sector play significant roles.

Production possibilities curve

A graph showing the maximum potential output combinations of two goods or services that an economy can achieve when all resources are fully and efficiently employed.

Circular flow of income

A model that illustrates the flow of goods, services, and income between households and firms in an economy.

Positive economics

The branch of economics that deals with objective explanations and the testing of economic theories that can be proven by empirical evidence.

Normative economics

The branch of economics that expresses value judgments about economic fairness or what the economy should be like.

Laissez Faire

An economic theory advocating minimal government intervention in the market.

Utilitarianism

A theory in economics and philosophy that suggests that actions are right if they are useful or for the benefit of a majority.

Utility

The state of producing a benefit/advantage or preventing mischief/pain to the user.

Adam Smith

The father of modern economics, known for his works on the theory of capitalism and the concept of the "invisible hand."

Jeremy Bentham

An economist and philosopher known for founding utilitarianism, which emphasizes the greatest good for the greatest number.

John Stuart Mill

An economist and philosopher who expanded on utilitarian principles, advocating for individual freedoms and social reforms.

Jean Baptiste-Say

A French economist known for Say's Law, which states that supply creates its own demand.

Say’s Law

An economic theory that states "supply creates its own demand," meaning that the production of goods and services generates the income necessary to purchase them, implying that general overproduction or long-term gluts in the market are unlikely.

Karl Marx

A philosopher and economist who critiqued capitalism and developed the theory of Marxism, advocating for socialism and communism.

John Maynard Keynes

An economist known for Keynesian theory, which advocates for government intervention to stabilize economic cycles.

Keynesian economics

A school of economics that propoxes active government intervention is necessary to manage economic recessions and control aggregate demand.

Milton Friedman

An economist known for his work on monetarism, which emphasizes the role of government in controlling the money supply to manage inflation.

Robert Lucas

An economist associated with the development of rational expectations theory and modern macroeconomic thought.

Behavioural economics

A field of economics that examines how psychological, cognitive, and emotional factors affect economic decisions.

Circular economy

An economic system aimed at eliminating waste and continuously using resources through reuse, repair, remanufacturing, and recycling.

Monetarism

An economic theory that emphasizes the importance of controlling the money supply to regulate inflation and stabilize the economy.

Doughnut economics

An economic model that balances human needs with planetary boundaries to achieve a sustainable economy, proposed by economist Kate Raworth.

Nudge Theory

A concept in behavioral economics proposing that positive reinforcement and indirect suggestions can influence behavior and decision-making.

Consumer rationality

The assumption in economics that consumers will make decisions to maximize their utility or satisfaction based on available information.

Economic good

A good or service that is scarce and has an opportunity cost, requiring resources to produce and having a price in the market.

Free good

A good that is abundant and does not have an opportunity cost, often available without a price (e.g., air or sunlight).

Opportunity cost

The value of the next best alternative that is foregone when a choice is made.

Resource allocation

The process of assigning available resources to various uses to achieve the most efficient and effective outcomes.

Resource reallocation

The process of redistributing resources from one use or sector to another to improve efficiency or meet changing demands.

Distribution of income

The way in which total income is shared among the different individuals or groups in an economy.

Redistribution of income

The transfer of income and wealth from certain individuals to others through mechanisms like taxation, welfare programs, or subsidies, aimed at reducing inequality.

Three basic economic questions

The fundamental questions of what to produce, how to produce, and for whom to produce in an economy.

Ceteris paribus

A Latin phrase meaning "all other things being equal," used in economics to isolate the relationship between two variables by holding other influencing factors constant.

Theory

A systematic explanation of economic phenomena or behavior based on principles and assumptions.

Law

A generally accepted principle that describes the consistent and universal behavior of an economic variable or relationship, such as the law of demand.

Model

A simplified representation of reality used to analyze economic behaviors, relationships, or outcomes.

Econometrics

The application of statistical and mathematical methods to economic data to test hypotheses, forecast economic trends, or estimate relationships.

Logic

The process of reasoning used to form conclusions or inferences in economics.

Hypothesis

A proposed explanation for a phenomenon, subject to testing and validation through observation and experimentation.

Leakages and injections

Concepts in the circular flow of income model: leakages are withdrawals from the economy (e.g., savings, taxes), and injections are additions (e.g., investment, government spending).

Equity

The fairness or justice of the distribution of resources, wealth, or opportunities within a society.

Value judgments

Opinions or evaluations based on personal beliefs, values, or preferences, rather than objective facts.

Classical economics

A school of economic thought that originated in the 18th century, based on the idea that the economy functions best with minimal government intervention and that free markets can regulate themselves.

New classical economics

A school of economic thought, strongly developed by economist Robert Lucas, that introduced rational consumer and firm expectations to macroeconomics.