IB Economics Definitions (CREATED BY ME!)

This one is easier to revise with

Opportunity cost

The next best alternative forgone when an economic decision is made

Market

Any physical or virtual arrangement where consumers and producers interact in order to carry out an exchange of goods and services

Market demand

The sum of the individual demand curves for a good of all consumers in a market

Capital

PHYSICAL CAPITAL refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. HUMAN CAPITAL refers to the education, training, skills and experience embodied in the labour force of a country. FINANCIAL CAPITAL refers to investments in financial instruments- such as stocks and bonds (this also provides an income for the holders or owners). NATURAL CAPITAL includes everything that is included in land, plus additional natural resources that occur in the environment, such as air, biodiversity, soil quality, the ozone layer and the global climate. This provides a stream of future benefits because it is necessary for humankind's ability to live, survive and produce in the future

"Ceteris Paribus"

A Latin expression meaning "other things being equal"

Competitive market

A market with many firms acting independently where no firm has the ability to control the price

Demand

The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus

Demand Curve

A curve illustrating the relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus. It is normally downward sloping.

Economics

Economics is the study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants

Factors of Production

Resources used in the production of goods and services; include capital and entrepreneurship/ enterprise (creativity of the other three factors of production) land (natural resources) and labour. Or CELL for short.

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases

Law of demand

A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus

Monopoly

A single firm in the market controlling the price

Normal goods

A good where the demand for it increases as income increases

Production Possibilities Curve (PPC)

A curve showing 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. ON THE LINE YOU ARE FULLY OPERATIONAL. AT POINT G, YOU ARE OUT OF RANGE. AT POINT H, YOU ARE NOT EFFICIENT. Whenever there are different processes, the curve will form a plateau. When they are similar, the line will be a flat line, called a Production Possibilities Frontier (PPF) instead.

Quantity demanded

The quantity of a good or service demanded at a particular price over a given time period, ceteris paribus

Subsidies

An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers

What is a table called in Economics?

A schedule

Why do we use "ceteris paribus"?

To simplify models by isolating a variable

Non Price Determents for DEMAND- RIPEN

Any factor (except price) affecting the demand of a product, which will cause a shift of the demand curve

RIPEN- R

RELATED PRODUCTS (SUBSTITUTES & COMPLEMENTS)

eg for donuts- brownies (substitute), cupcakes AND cookies (complements)

RIPEN- I

Proportion of INCOME spent on normal goods and inferior goods

RIPEN- P

Preferences and Tastes

RIPEN- E

Expectations of future prices- if the consumers expect an increase in the price of a good, they will buy the good now. Example- GOLD.

RIPEN- N

Number of Consumers- If the no. of consumers increase, so does the demand.

Basic Economic Problem

How do we use limited resources to satisfy unlimited wants of consumers? WHAT, HOW, FOR WHOM are we going TO PRODUCE?

Utility

A measure of the satisfaction derived from consuming a good of service. Measured in "utils"

Marginal Utility

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

What are the three reasons of the negative relationship of demand

1) The law of diminishing marginal utility

2) The income effect

3) The substitution effect

The law of diminishing utility

The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases.

Formula for marginal utility

MU= (change in total utility) / (change in no. of units consumed)

The demand curve can also be called what?

The marginal benefit curve D=MD

The income effect

As the price of a good decreases, your purchasing power increases and as a result- the quantity demanded for the product increases, demonstrating relationship of price and quantity demanded

The Substitution effect

When the price of a product falls relative to other product prices, consumers purchase more of the product as it is now relatively less expensive. This forms part of an explanation of the law of demand.

Supply

Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.

Supply curve

A curve showing the relationship between the price of a good or service and the quantity supplied, ceteris paribus. It is normally upward sloping.

Market supply

the sum of all individual suppliers for a product at very price

The law of supply

states that there is a positive relationship between the price of a good and its quantity supplied over a particular time period, ceteris paribus

Non price determents for SUPPLY- CISTERN

lol just look at the next few flashcards for each letter of CISTERN

CISTERN- C

Cost of factors of production (CELL) as these increase, the supply will decrease

CISTERN- I

Indirect Taxes. These are placed by the government on the expenditure of goods/services. The producer pays the tax and indirect taxes passes all on for part of the tax of consumers. eg. VAT (value added tax)

Excise duty

Tax on demerit (harmful) goods- tax on cigarettes.

CISTERN- S

Subsidies. Financial assistance by the government to a specific firm or industry to encourage production. If the government provides subsidies, the firm's COP decreases and production increases. RIGHT SHIFT OF THE SUPPLY CURVE

Profit

Total revenue- Total costs

CISTERN- T

Technological change- An improvement in technology can lower production costs (as it increases productivity) and results in greater production and therefore supply.

CISTERN- E

Expectations of future prices- if a firm expects the price in the market to increase in the near future, they are likely to withhold the production as they can get higher profits later.

CISTERN- R

Prices of Related goods. IN A COMPETITIVE OR JOINT SUPPLY.

Competitive supply

When goods that a firm is producing use the same resources in their production process. The goods thus compete with each other for the use of the same resources. IF THE PRICE OF ONE INCREASES (THE SUPPLY WILL INCREASE) BUT THE SUPPLY FOR THE OTHER DECREASES.

Joint supply

Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other. IF PRICE OF ONE INCREASES, THE QUANTITY SUPPLIED OF BOTH WILL INCREASE.

CISTERN- N

DIVISION OF LABOUR- SPECIALIZATION

Tariff

A tax that is placed on imports to protect domestic industries from foreign competition and to raise revenue for the government

What is microeconomics

One product market

What is macroeconomics

Whole economy of a country

What three things are affected by government policies

Economic growth, unemployment, inflation

Sectors of the economy (4 types)

Primary, Secondary, Tertiary, Quaternary

GDP

Gross Domestic Product- The market value of all final goods/ services produced in a country over a time period (usually a year). LOOK AT IMAGE FOR FORMULA

Characteristics of money

Acceptable, durable, divisible, valuable

Key functions of money

Medium of exchange, measure of value, store of value

Law of diminishing marginal returns

A short-run law of production stating that as more and more units of the variable factor (usually labour) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate or, equivalently, marginal product starts to decrease.

Law of diminishing marginal utility

The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases.

Market Equilibrium

In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.

What to include in a Supply and Demand diagram EXPLANATION?

1. Why is there a shift? Price, or non price determinants?

2. Excess explanation

3. How excess is eliminated explanation

4. New equilibrium

Consumer surplus

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay. Consumer surplus is ALWAYS above the equilibrium price and below the demand curve.

Producer Surplus

The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive. Producer Surplus is ALWAYS below the equilibrium price and above the supply curve.

Community Surplus

consumer surplus + producer surplus. It represents the total benefit available to society from an economic activity.

Allocative efficiency

Achieved when just the right amount of goods and services are produced from society's point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).

Aggregate demand (AD)

The total quantity of goods and services that all buyers in an economy (consumers, firms, the government and foreigners) want to buy over a particular time period, at different possible price level, ceteris paribus

Aggregate Supply (AS)

The total quantity of goods and services produced in an economy over a particular time period, at different price levels, ceteris paribus.

Business cycle

The short-term fluctuations of real GDP around its long-term trend (or potential output).

Central Bank

An institution charged with conducting monetary and exchange rate policy, regulating behaviour of commercial banks, and providing banking services to the government and commercial banks.

Cicular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redfeine 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

Circular flow of income

A simplified model of the economy that shows the flow of money and expenditures in an economy.

Welfare loss

A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal private benefits.

Elasticity of demand

Elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to changes in one of the factors that determines it.

Price Elasticity of demand (PED)

Price elasticity of demand (PED) is a measure of how much the quantity demanded of a good changes when there is a change in its own price.

Determinants of Price Elasticity of Demand (PED) (SPLAT)

1. Substitutes: The availability of close substitutes makes demand more elastic.

2. Proportion of income: Goods that represent a larger percentage of a person's income will have more elastic demand.

3. Luxury or necessity: Necessities have inelastic demand, while luxury goods have elastic demand.

4. Addictiveness: Addictive goods have inelastic demand.

5. Time: Demand is more elastic in the long run than in the short run, as consumers have more time to adjust their behavior.

PED formula?

What happens when PED is the following:

1. PED > 1

2. 0 < PED < 1

3. PED = 1

4. PED = 0

5. PED = ∞

• Price elastic demand- A change in price leads to a proportionately greater change in the quantity demanded.

• Price inelastic demand- A change in price leads to a proportionately smaller change in the quantity demanded.

• Unitary elastic demand- A change in price leads to a proportionately equal change in the quantity demanded.

• Perfectly inelastic demand- A change in price leads to no change in the quantity demanded.

• Perfectly elastic demand- Any change in price would lead to an infinite change in the quantity demanded.

What is the AD formula and what does each letter stand for?

AD = C + I + G + (X-M)

Where each letter stands for (in order):

• Consumer Expenditure/ Spending

• Investment

• Government Spending

• Exports

• Imports

What are the components of C (Consumer Spending) in AD?

Changes in:

• Consumer confidence

• Interest rates

• Wealth

• Income/ corporate tax

• Level of indebtness

• Future price levels

What are the components of I (Investment) in AD?

Changes in:

• Business confidence

• Interest rates

• Technology

• Business taxes

• Level of corporate indebtness

• Legal/ institutions changes

What are the components of G (Government Spending) in AD?

Changes in:

• Polititcal priorities

• Economic priorities: delibrate effors to influence aggregate demand

What are the components of Net Exports (X-M) in AD?

(This is more related to the Global unit however, useful to know anyway)

Changes in:

• National income abroad

• Exchange rates

• Level of trade protection