IB HL Economics definitions

Social Science

Study of people in society

Good

A tangible product

Service

An intangible product

Choices

The requirement to make decisions as resources are finite

Economic agents

consumers who look to maximise profit and governments who look to maximise welfare

The economic problem

The need to consider what to produce and in what quantities, how to produce it, who for due to the problem of scarcity

Scarcity

Caused by the economic problem and the fact that wants are infinite and resources are finite

Free good

when there is no scarcity of a good and there is an infinite supply

Economic good

A good which has a finite supply and is therefore scarce and has an opportunity cost

Opportunity cost

The next best alternative that is foregone

Trade-off

what is lost as a result of a decision

Sustainability

considering the impact on future generations of

Factors of production

resources needed to produce goods and services

Land

Includes all natural resources used, Natural capital, e.g. soil, minerals and oil

Labour

Includes all human resources used, Human capital, e.g. Physical and mental contribution of existing workforce to production

Capital

Includes anything that is created by humans to produce a good or service, Physical capital, e.g. buildings, offices, factories, machines, tools, infrastructure and technology

Investment

when firms spend money on capital

Management

the organising and risk taking in production

Entrepreneurship

organisation of factors of production to produce goods and services. Entrepreneurs may use their personal money or investors money to develop new ways of doing things. e.g. creating new products, buying production factors, and making profit

Economics

The science that studies human behaviour

Ceteris Paribus

All other things being equal, used to isolate the effect of 1 variable assuming there is no change in any other variable

Positive economics

Describing and analysing economic relationships and making factual objective claims that are based off scientific methods that use logic. This generates empirical evidence to disprove a statement. Deals with areas of economics that are capable of being right or wrong.

Positive statements

Statements concerned with real time facts or what can be true or false. Used to explain casual relationships

Normative economics

How things SHOULD be, involving subjective value judgements and opinion based words. e.g. should, ought, too little, and too much.

Normative statements

Statements cannot be true or false and deal with areas of the subject that are open to personal opinion

Efficiency

A quantifiable concept determined by the ration of useful output to total input

Equity

The concept or idea of fairness

Economic well-being

A multi-dimensional concept relating to the level of prosperity and quality of living standards in a country

Economic actors

Individuals/ households, firms and markets

Producers

Businesses, companies, corporations, firms, and suppliers

Assumed motive of firms

To maximise revenue whilst minimising costs in order to maximise profit, maximise welfare

Assumed motive of consumers

Maximum utility

Utility

A measure of the satisfaction derived from purchasing a good or service

Microeconomics

looks a behaviour at the level of individual people, individual firms, and individual markets

Macroeconomics

Looks at the economic actions of national governments, and on a global level

Economic models

Models that help to explain economic choices we make in our daily lives

PPC

Displays on a graph all factors of production when they are fully and efficiently employed

PPC shows…

how much of two goods can be produced when all factors of production are fully and efficiently employed and shows opportunity cost of future decisions.

PPC line meaning…

Maximum you can get with current resources

Any point on the PPF is

productively efficient

How does PPC demonstrate scarcity

Curve shows finite resources

How to demonstrate opportunity cost on curve

movement along the curve

How does a PPC demonstrate unemployment of resources

Dot is not on the line

Allocative efficiency for PPC

if an economy has chosen a place on the line of the PPC they have distributed their factors of production that fit their environment

Law of increasing opportunity cost

most resources are better suited to producing some goods more than others

Points outside the PPC are

unattainable

Imperfect factor substitution causes

changing opportunity cost

Improve capital by

increasing investment and use of technology

Demand

quantity consumers are willing and able to buy at a given price in each time period

As price increases

As demand falls

As price decreases

As demand rises

Income effect

As prices fall more people can afford more, increased purchasing power

Substitution effect

As prices increase a substitute good will be found and bought instead

Law of diminishing marginal utility

For every additional unit consumed , as prices decrease satisfaction increases

Non price determinants of demand

Changes in real income, changes in tastes, changes in price of substitute and complementary goods, changes in consumers, future price expectations

Increase in demand

shifts demand out to the right

Real income

Income adjusted for inflation

Nominal income

Income not adjusted for inflation

Inflation

A sustained increase in the general or average level of prices and a fall in the value of money

Bonuses

rise in income but due to inflation real income often decreases

Inflation rate

the percentage change of a price index over a certain time period

Inflationary gap

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

Informal market

the part of an economy that is neither taxed nor monitored by the government. Activities are not included in a country’s national income figures.

Complementary goods

Goods that are needed when another is purchased

Increase in £ of substitute good

Increase in demand of good

Decrease in £ of substitute good

decreases demand of good

Supply

How much firms are willing and able to produce at a given price

Law of supply

When price increases supply increases due to motive of profit

Profit motive

driving force behind private sector businesses engaging in different markets and industries. Assumes that rational firms choose an output and price that will maximise profit

Changes in price lead to

shifts in supply

Non price conditions of supply

PINTSWC

PINTSWC

Productivity, Indirect taxes, Number of firms, Technology, Subsidies, Weather, Costs of production

Productivity

output per worker in a given time period

Indirect tax

A tax on expenditure that increases cost of a product

Subsidies

Grants given by the governments that decreases cost of production. Causes there to be more capital available for production so firms are willing to supply more

Market equilibrium

a situation in which the quantity of a good or service supplied by producers is equal to the quantity demanded by consumers. Where demand meets supply on a graph

Surplus

When supply is greater than demand

Shortage

When there is more demand than supply

Market demand

The sum of the individual demand for a product from buyers in the market

Individual demand

The price that a consumer is willing and able to pay for a good or service in each time period

Market supply

supply of all individual producers in a market

Non price aspects of supply cause

shifts in supply

Standard theory

Assumes rational firms choose an output price to maximise profit

Marginal cost increases with output because

there is an increase in price with every unit as producers want higher price.

Diminishing marginal returns

adding an additional factor of production results in smaller increases in output

Shifts in supply are caused by

price factors

price factors examples

change in unit costs, falling exchange rates, more advanced technology, new products, indirect taxes, subsidies, regulations

Signalling

when the market signals to the supplier that there is excess demand or supply that needs to be eradicated from the market

Example of a signal

Waiting list

Effect of a signal

Incentivises producers to increase the price of their good or service and to produce more, causing an expansion along the supply curve. As price rises consumers are rationed out of the market until price equilibrium is reached

Rationing

Prices serve to ration scarce resources when market demand outstrips supply

Effects of rationing

As prices rise consumers leave the market. As prices fall suppliers may use their resources to produce other goods.

Consumer surplus

gain of all consumers who can consume a product at a lower price than what they were willing and able to pay.

Producer surplus

gain of all producers who can produce a product at a higher price than what they were willing and able to earn

Social surplus

The sum of consumer and producer surplus

Allocative efficiency

the social optimum when resources are distributed in the most effective and beneficial way

Market faliure

the inability of the free market to achieve allocative efficiency resulting in a loss of economic welfare.

Rational consumer choice

the assumption that all consumers make rational decisions based on their preferences and budget constraints, aiming to maximize their utility.