📚 IB Economics HL Flashcards (Unit 1 + Unit 2.1 + Unit 2.2)

Economics

The study of how societies allocate scarce resources to satisfy unlimited wants.

Scarcity

The basic economic problem: resources are finite while human wants are infinite.

Choice

Because of scarcity, people must choose what to produce, how, and for whom.

Opportunity Cost

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

Economic Good

A good that is relatively scarce and has an opportunity cost.

Factors of Production

Inputs used to produce goods/services: Land, Labour, Capital, Entrepreneurship.

Land

All natural resources ("gifts of nature") like forests, oil, minerals, rivers.

Labour

Human effort (physical and mental) used in production.

Capital

Man-made resources (machinery, tools, factories, infrastructure) used in production.

Entrepreneurship

The skill of organising resources, innovating, and taking business risks.

Planned Economy

An economy where the government makes decisions on what, how, and for whom to produce.

Market Economy

An economy where resource allocation is determined by price signals and the forces of supply and demand.

Mixed Economy

An economy with both market mechanisms and government intervention.

Positive Economics

Statements that are objective and fact-based.

Normative Economics

Statements that are value-based and involve opinions and judgments about what should be.

Production Possibility Curve (PPC)

A model showing the maximum combinations of two goods that can be produced with fixed resources and technology.

Efficiency (PPC)

Any point on the PPC where resources are fully and efficiently used.

Inefficiency (PPC)

Any point inside the PPC, showing underutilisation of resources or unemployment.

Economic Growth (PPC)

Shown by an outward shift of the PPC due to more resources or better technology.

Demand

The quantity of a good/service consumers are willing and able to buy at a given price in a given time period.

Law of Demand

As the price of a good falls, quantity demanded increases, ceteris paribus.

Movement along the Demand Curve

Change in quantity demanded due to a change in the good's own price.

Shift of the Demand Curve

Change in demand caused by non-price determinants.

Non-Price Determinants of Demand

Income, tastes/preferences, prices of substitutes, prices of complements, demographics.

Substitute Goods

Goods that can replace each other (e.g., tea and coffee).

Complementary Goods

Goods used together (e.g., cars and petrol).

Income Effect (HL)

When the price of a good falls, real income rises, so consumers buy more.

Substitution Effect (HL)

When the price of a good falls, it becomes cheaper relative to other goods, so consumers switch to it.

Law of Diminishing Marginal Utility (HL)

As more of a good is consumed, the extra satisfaction (marginal utility) gained from each additional unit decreases.

Supply

The quantity of a good/service firms are willing and able to produce at a given price in a given time period.

Law of Supply

As the price of a good increases, quantity supplied increases, ceteris paribus.

Movement along the Supply Curve

Change in quantity supplied due to a change in the good's own price.

Shift of the Supply Curve

Change in supply caused by non-price determinants.

Non-Price Determinants of Supply

Costs of production, technology, number of firms, indirect taxes, subsidies, natural factors.

Indirect Taxes

Taxes imposed on goods/services (e.g., VAT), which increase costs of production.

Subsidies

Government payments to producers to reduce costs of production and encourage output.

Law of Diminishing Marginal Returns (HL)

When more of a variable factor (labour) is added to fixed factors (land/capital), output increases at a decreasing rate.

Increasing Marginal Costs (HL)

As output rises, the cost of producing each additional unit increases, due to inefficiency.

Reason Supply Curve Slopes Upward (HL)

Because of diminishing marginal returns and increasing marginal costs.

Market Mechanism

The process by which prices adjust to reconcile demand and supply, allocating resources.

Invisible Hand

Adam Smith's idea that individual pursuit of self-interest unintentionally benefits society through market outcomes.

Allocative Efficiency

Producing the mix of goods and services most desired by society, represented by the optimal point on the PPC.

Productive Efficiency

Producing goods at the lowest possible cost, represented by any point on the PPC.

Ceteris Paribus

"Other things being equal" - holding all non-relevant factors constant when analysing economic relationships.