IB Economics

Scarcity

the condition that results from limited resources combined with unlimited wants

Opportunity Cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Factors of Production

resources of land, labor, capital, and entrepreneurship used to produce goods and services

Land

the physical location where production occurs. Includes bodies of water as well as resources extracted from the earth.

Labor

the work done by humans that is used in the production of goods and services.

Capital

previously manufactured goods used to make other goods and services

Entrepreneurship

the process of starting, organizing, managing, and assuming the responsibility for a business

Market

a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

Demand

The quantity of a good or service that consumers are willing and able to purchase at a given price in a given period of time.

Consumer Demand

The amount of a good or service a consumer is willing and able to purchase at a range of prices.

Market Demand

the demand by all the consumers of a given good or service

Law of Demand

the claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises

Demand Curve

a graph of the relationship between the price of a good and the quantity demanded.The Law of Demand implies that this curve is negatively sloped.

Determinants of Demand

Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price.

Supply

The quantity of a product that producers are willing and able to produce at a given price in a given period of time.

Market Supply

the total of all individual suppliers' products in a market at a particular time

Determinants of Supply

Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Scarcity

when a price is below equilibrium causing quantity demanded to be greater than quantity supplied

Surplus

when a price is above equilibrium causing quantity demanded to be less than quantity supplied

Price Mechanism

price signals which determines allocation of resources through interaction of supply and demand

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. It is seen as excess utility for the consumer.

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it. It is viewed as excess satisfaction for the producer.

Community Surplus

the sum of consumer and producer surplus; the total benefit to society, this is maximised at the equilibrium.

Allocative Efficiency

the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal

Price Elasticity of Demand

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.

Price elastic

The demand for a product is highly responsive to price changes. The range of a demand curve where elasticities of demand are greater than 1.0.

Price inelastic

The demand for a product is not very responsive to price changes. The range of a demand curve where elasticities of demand are less than 1.0.

Unit elastic

a given change in price causes a proportional change in quantity demanded. The point of any demand curve where revenue is maximised.

Perfectly elastic demand

Any increase in price results in all demand being eliminated.

Perfectly inelastic demand

the case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.

Substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other. Occurs when XED is a positive value.

Complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other. Occurs when XED is a negative value.

Income Elasticity of Demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

Normal good

a good for which demand goes up when income is higher and for which demand goes down when income is lower.

Inferior good

a good that consumers demand less of when their incomes increase. Occurs when yED is a negative value.

Price Elasticity of Supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Indirect Tax

a tax levied on goods or services rather than on persons or organizations

Specific Tax

a fixed amount that is imposed upon a product by the government; it has the effect of shifting the supply curve vertically upwards by the amount of the tax.

ad valorem tax

an indirect tax where a percentage is added to the selling price of each unit.

Excise tax

A tax on a good that is often meant to limit consumption of that good.

Tax incidence

the actual division of the burden of a tax between buyers and sellers in a market

Subsidies

Government payments given to certain industries to help offset some of their costs of production. It has the effect of shifting the curve vertically downwards.

Price Ceiling

a maximum price that can be legally charged for a good or service: set below equilibrium

Price Floor

a legal minimum on the price at which a good can be sold: set above equilibrium

Externalities

economic side effects or by-products that affect an uninvolved third party; can be negative or positive

Positive externality of consumption

When there is a spillover benefit of consuming a good or service onto a third party.

Positive externality of production

when the production of a good or service creates a benefit to third parties.

Merit Good

a good or service considered as beneficial for people and that would be under provided by the market and so under consumed

Demerit Good

a good or service considered to be harmful for people who consume them and society as a whole. If left to the market forces or private enterprise, they would be over-produced and thus over consumed

Tradable Permits

licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)

Deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

Public Good

A good that is neither excludable nor rivalrous in consumption

Free Rider Problem

tendency for people to refrain from contributing to the common good when a resource is available without requiring any personal cost or contribution

Common Access Resource

a resource that is owned by no one, but is available to all users at little or no charge

Sustainability

providing the best outcomes for human and natural environments both in the present and for the future

Asymmetric Information

situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace

Short Run

a period of time sufficiently short that at least one of the firm's factors of production cannot be varied

Long Run

A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.

Total Product

all the goods and services produced by a business during a given period of time with a given amount of input

Economies of Scale

factors that cause a producer's average cost per unit to fall as output rises in the long run

Diseconomies of Scale

factors that cause a producer's average cost per unit to rise as output rises in the long run

Necessity Goods

products that have income elasticity between 0 and 1. When consumer income grows, quantity demanded rises by less than the rise in income.

Luxury Goods

goods that have income elasticities greater than 1. when consumer income grows, quantity demanded of luxury goods rises more than the rise in income

Negative externality of consumption

when a good or service consumed by individuals adversely affects third parties

Negative externality of production

when the production of a good or service adversely affects third parties

Average product

the average amount produced by each unit of a variable factor of production

Macroeconomics

the branch of economics that studies the overall working of a national economy

Circular Flow of Income

economic model that pictures income as flowing continuously between businesses and consumers

Leakages

withdrawals from an economy's circular flow which include savings, taxes, and imports

Injections

additions to an economy's circular flow which include investments, government spending, and exports

Gross Domestic Product

The total value of goods and services produced within the borders of a country during a specific time period, usually one year.

Gross National Product

The total value of goods and services, including income received from abroad, produced by a country's factors of production within a specific time period, usually one year.

Net National Product

A measure of all goods and services produced by a country in a year, including production from its investments abroad, minus the loss or degradation of natural resource capital as a result of productivity.

Purchasing Power Parity

a measure of how many units of currency are needed in one country to buy the amount of goods and services that one unit of currency will buy in another country

Real __________________

any economic statistic adjusted for changes in price

Nominal

any unadjusted number

green GDP

impact of production on air pollution, water pollution, soil depletion, and the loss of other natural resources

Output Method

The value of output produced by the economy, but only counting the value added at each stage of production.

Expenditure Method

A method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period. C+I+G+(X-M)

Income Method

Adding up all the money earned by people and firms in producing this year's output, wages and salaries+ rent+ profits+ interest

Deflator

a statistical factor designed to remove the effect of inflation

Expansion

a period of economic growth as measured by a rise in real GDP

Contraction

a period of economic decline marked by falling real GDP

Recovery

the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again

Business Cycle

recurring fluctuations in economic activity consisting of contraction and recovery and growth and decline. It is measured in terms of Real GDP.

Potential Output

The real output (GDP) an economy can produce when it fully employs its available resources

Aggregate Demand

the amount of goods and services in the economy that will be purchased at all possible price levels

Aggregate Supply

the total amount of goods and services in the economy available at all possible price levels

Consumption

spending by households on goods and services, with the exception of purchases of new housing

Investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

Inventory Investment

Changes in the stock of unsold goods and raw materials held during a period.

Net Exports

spending on domestically produced goods by foreigners minus spending on foreign goods by domestic residents

Consumer Confidence

the extent to which people are optimistic or pessimistic about the future health of the economy and how they will fare down the road. These beliefs influence how much money they will pump into the economy when making discretionary purchases.

Disposable Income

the money left to spend or save after taxes have been paid

Supply Shock

An unexpected event that causes the short-run aggregate supply curve to shift

Short Run Aggregate Supply

The relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant.

Long Run Aggregate Supply

Output isn't affected by the price level; curve is vertical. Viewpoint associated with the New Classical/Monetarist Viewpoint

"Sticky wages and prices"

Keynesian viewpoint: wages and prices can easily rise, but are unlikely to fall.

Keynesian Aggregate Supply

Aggregate Supply goes from high levels of spare capacity (low competition) to low levels of spare capacity (high competition) as a result of increasing Aggregate Demand.