IB Economics HL Terms

Actual output

The quantity of output actually produced by an economy.

Ad Valorem Taxes

Taxes calculated as a fixed percentage of the price of the good or service; the amount of tax increases as the price of the good or service increases.

Allocative efficiency

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers. Marginal Cost = Marginal Benefit

Cap and Trade Scheme

A scheme in which a government authority sets a limit or 'cap' on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits (tradable permits) distributed to firms.

Carbon tax

A tax per unit of carbon emissions of fossil fuels.

Central Bank

A financial institution that is responsible for regulating the country's financial system and commercial banks, and carrying out monetary policies.

Ceteris Paribus

"other things being equal"

Clean technology

Technology that is not polluting, associated with environmental sustainability. Examples: Solar power, wind power, hydropower, and recycling.

Competitive market

A market composed of many buyers and sellers acting independently, none of whom has any market power.

Competitive supply

A situation where two goods compete for the same resources. Example: A farmer can produce wheat or corn, but producing ore of one means producing less of the other.

Competition

A situation that occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market.

Complement goods

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.

Consumer surplus

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid.

Consumption

Spending by households (consumers) on goods and services (excludes spending on housing).

Costs of production

The total opportunity costs incurred by firms in order to acquire resources for use in production.

Cross-price elasticity of demand (XED)

A measure of the responsiveness of the demand for one good to a change in the price of another good.

Demand

Indicates the various quantities of good that consumers are willing and able to buy at different possible prices during a particular time period.

Demand curve

A curve showing the relationship between the quantities of a good consumers are willing and able to buy during a particular time period and their respective prices.

Demerit goods

Goods that are considered to be undesirable for consumers and are over-provided by the market.Reasons include negative externalities, and consumer ignorance of harmful effects. Ex. garettes.

Depreciation

A decrease in the value of currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system.

Direct taxes

Taxes paid directly to the government tax authorities by the taxpayer, including personal income taxes, corporate income taxes, and wealth taxes.

Disposable income

The income of consumers that is left over after the payment of income taxes.

Dumping

The practice of selling a good in international markets at a price that is below the cost of producing the good.

Economic efficiency

A condition that arises when allocative efficiency is achieved.

Economic growth

Increases in total real output produced by an economy over time.

Economics

The study of choices leading to the best possible use of scarce resources in order to best satisfy the unlimited human needs and wants.

Elasticity

A measure of responsiveness or sensitivity of a variable to changes in any of the variable's determinants.

Entrepreneurship (FACTOR OF PRODUCTION)

It involves a special human skill that includes the ability to innovate by developing new ways of doing things, to take business risks and to seek new opportunities for opening and running businesses.

Equilibrium

A state of balance such that there is no tendency to change.

Equity

The condition of being fair or just.

Errors and omissions (BALANCE OF PAYMENTS)

An item that is included to account for possible omissions and errors in items that have been included or excluded in order to ensure that the balance of payments balances.

Excess demand (Shortage)

Occurs when the quantity of good demanded is greater than the quantity supplied.

Excess supply (Surplus)

Occurs when the quantity of a good demanded is smaller than the quantity supplied.

Excise taxes

Taxes imposed on spending on particular goods or services.

Externality

Occurs when the actions of consumers or producers give rise to positive or negative side-effects on other people who are not part of these actions, and whose interests are not taken into consideration.

Factors of production

All resources or inputs used to produce goods and services. LAND, LABOR, CAPITAL, AND ENTREPRENEURSHIP.

Government budget

A type of plan of a country's tax revenues and government expenditures over a period of time.

Government intervention

The practice of government to intervene in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.

Gross domestic product (GDP)

A measure of the value of aggregate output of the economy. It is the market value of all final goods and services produced within a country during a given time period.

Gross national income (GNI)

A measure of total income received by the residents of the country, equal to the value of all final goods and services produced by the factors of production supplied by the country's residents. GNI = GDP + (income from abroad - income sent abroad).

Human capital

The skills, abilities, and knowledge acquired by people, as well as good levels of health, all of which make them more productive.

Income approach

A method used to measure the value of aggregate output of an economy, which adds up all income earned by factors of production in the course of producing all goods and services within a country over a given time period.

Income elasticity of demand (YED)

A measure of the responsiveness of demand to changes in income.

Indirect taxes

Taxes levied on spending to buy goods and services, called indirect because payments of some or all of the taxes by the consumer is paid to the government authorities by the firms.

Inferior good

A good the demand for which varies negatively with income. As income increases, the demand for the good decreases.

Interest

A payment, per unit of time, for the use of borrowed money (borrowers pay interest, lenders receive interest.)

Interest rate

Interest expressed as a percentage.

Joint supply

Refers to the production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other. Example: Butter and Skimmed milk are both produced from whole milk, producing more of one means to produce more of the other.

Labor (FACTOR OF PRODUCTION)

The physical and mental effort that people contribute to the production of goods and services.

Land (FACTOR OF PRODUCTION)

All natural resources: land and agricultural land, including minerals, oil reserves, underground water, forests, rivers, and lakes.

Law of Demand

A law stating that there is a negative causal relationship between the price of a good and quantity of the good demanded, over a particular time.

Law of Supply

A law stating that there is a positive causal relationship between the price of a good and quantity of the good supplied, over a particular time.

Luxuries

Goods that are not necessary or essential; They have an elastic PED and elastic YED.

Marginal benefit

The extra or additional benefit received from consuming one more unit of a good.

Marginal cost

The extra or additional cost of producing one more unit of output.

Marginal private benefits

The extra benefit received by consumers when they consume one more unit of a good.

Marginal private costs

The extra costs to producers of producing one more unit of a good.

Marginal social benefits

The extra benefits to society of consuming one more unit of a good.

Marginal social costs

The extra costs to society of producing one more unit of good.

Market

Any kind of arrangement where buyers and sellers of a particular good, service, or resource are linked together to carry out an exchange.

Market demand

Refers to the sum of all individual consumer demands for a good or service.

Market failure

Occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society. There is either an underallocation or an overallocation.

Market supply

Refers to the sum of all individual firm supplies of a good or service.

Maximum price (Price ceiling)

A legal price set by the government, which is below the market equilibrium price.

Merit goods

Goods that are held to be desirable for consumers, but which are underprovided by the market. Reasons for underprovision: Good may have positive externalities, unafforibility, or consumer ignorance about the benefits of the good.

Microeconomics

The branch of economics that examines the behavior of individual consumer and firm.

Minimum price (price floor)

A legal price set by the government which is above the market equilibrium price to fall to its equilibrium level determined by a free market.

Minimum wage (price floor)

A minimum price of wage set by governments in the labor market, in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services.

Money

Anything that is acceptable as payment for goods and services.

Necessities

Goods that are necessary of essential. They have inelastic PED and inelastic YED.

Negative externality (also known as spillover costs)

A type of externality where the side-effects on third parties are negative or harmful.

Negative externality of consumption

A negative externality caused by consumption activities, leading to a situation where MSB

Negative externality of production

A negative externality caused by production activities, leading to a situation where MSC >MPC.

Non-excludable

A characteristics of some goods where it is not possible to exclude someone from using a good, because it is not possible to charge a price. It is one of the characteristics of public goods.

Non-price determinants of demand

The variables that can influence demand: Income, Preferences, Prices of related goods (Substitution and Complementary), and Demographic changes.

Non-price determinants of supply

The variables that can influence supply: Costs of factor of production, Price of related goods (Joint Supply and Competitive Supply), Technology, Producer expectations, Taxes, The number of firms, Supply shocks and Subsidies.

Non-price rationing

The apportioning or distributing of goods among interested users/buyers through means other than price, often necessary when there are price ceilings (maximum prices); may include waiting in line (queues) and underground markets; to be contrasted with 'price rationing', which involves distributing goods among users by means of market-determined prices.

Non-rivalrous

A characteristic of some goods where the consumption of the good by one person does not reduce consumption by someone else; it is one of the two characteristics of public goods.

Normal good

a good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases.

Normative economics

The body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be. Normative statements cannot be true or false; they can only be assessed relative to beliefs and value judgements. Normative economics forms the basis of economic policies.

Opportunity cost

The value of the next best alternative that must be given up or sacrificed in order to obtain something else.

Overallocation of resources

Occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in its overproduction.

Overvalued currency

A currency whose value is higher than its free-market value; may occur if the exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely floating exchange rater system.

Perfectly elastic demand

Refers to a price elasticity of demand value of infinity, and arises in the case of a horizontal demand curve.

Perfectly elastic supply

Refers to a price elasticity of supply value of infinity, and arises in the case of a horizontal supply curve.

Perfectly inelastic demand

Refers to a price elasticity of supply value of zero, and arises in the case of a vertical demand curve.

Perfectly inelastic supply

Refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve.

Personal income taxes

Taxes paid by households or individuals in households on all forms of income, including wages, rental income, interest income, and dividends (income from ownership of shares in a company); is the most important source of government tax revenues in many countries (especially economically more developed countries).

Physical capital

One of the factors of production, which is itself produced (it doesn't occur naturally), used to produce goods and services; includes machinery, tools, factories, buildings, road systems, airports, telephone supply lines, etc. Also referred to as 'capital', or 'capital good' or 'investment good'.

Positive externality (also known as Spillover Benefits)

A type of externality where the side-effects on third parties are positive or beneficial.

Positive externality of consumption

A positive externality caused by consumption activities, leading to a situation where MSB>MPC.

Positive externality of production

A positive externality caused by production activities, leading to a situation where MSC > MPC.

Potential output

The level of output that can be produced when there is "full employment".

Poverty

The inability of an individual or family to afford an adequate standard of goods and services. It may be relative or absolute.

Preferential trade agreement

An agreement between two or more countries to lower trade barriers between them on particular products, resulting in an easier access to the markets of other members for selected products, compared with the access of countries that are not members.

Price control

Setting of minimum or maximum prices by governments so that prices are unable to adjust to their equilibrium level determined by demand and supply.

Price elastic demand

Relatively high responsiveness of demand to changes in price. PED > 1

Price elastic supply

Relatively high responsiveness of supply to changes in price. PES > 1

Price inelastic demand

Relatively low responsiveness of demand to changes in price. PED < 1

Price inelastic supply

Relatively low responsiveness of supply to changes in price. PES < 1