IB Economics definitions

Social Science

the study of people in society and how they interact with each other.

Economics

the study of how people use their limited resources to try to satisfy unlimited wants.

Microeconomics

the study of the economic behaviour of households and firms and how prices of goods and services are determined.

Positive Statement

a statement about what is. This is an expression that can be verified by observation.

Normative Statement

a statement about what ought to be. This is an expression of an opinion that cannot be verified by observation

Ceteris Paribus

the assumption that all other things are held equal, or constant, except those under study.

Scarcity

the state in which wants exceed the amount that available resources can produce.

Factors of production

inputs used in the production of the goods and services that are land, labour, capital and enterprise.

Land

the natural resource that is available without alteration or effort on the part of labour. Land as a resource includes only original fertility and mineral deposits, topography, climate, water, and natural vegetation.

Labour

the human resource involving productive contributions of persons who work, which involve both thinking and doing.

Capital

factors of production that have themselves been produced by man (machines, factories, ships...).

Enterprise

the factor of production involving human resources that performs the functions of raising capital, organising, managing, assembling other factors of production, and making basic business policy-decisions: the risk taker.

Rent

return to the factors of production that is land.

Wages

return of the factors of production that is labour

Profit

the difference between total revenues and the opportunity cost of all factors of production.

Interest

the payment for current rather than future command over resources, the cost of obtaining credits. Also, the return paid to owners of capital.

Revenue

the income that a firm receives from selling its products, goods and services, over a certain time period.

Earnings

revenue minus the costs of sales, operating expenses and taxes over a given period of time.

Income

the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. Income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received in a given period of time.

Choice

people deciding between two alternative ways to allocate their limited financial resources because they do not have infinite incomes

Utility

the measure of usefulness and pleasure.

Marginal Utility

the extra utility gained from consuming one more unit of a product.

Total Utility

the total satisfaction gained from consuming a certain quantity of a product.

Diminishing Marginal Utility

a psychological generalization that the perceives value of, or satisfaction gained form, a good to a consumer declines with each additional unit acquired or consumed.

Opportunity Cost

the cost of any activity measured in terms of the best alternative activity, which is forgone.

Free Goods

any good or service that is available in quantities larger than are desired at a zero price.

Economics Goods

any good or service that is scarce.

Public Good

a good, which is non-excludable and non-rivalrous. A good which can be jointly consumed by many individuals simultaneously, at no additional cost, and with no reduction in the quality or quantity of the provision concerned.

Private Good

a good (or service), each unit of which is consumed only one individual.

Capital Goods

goods that are used in the production of other goods. Examples include ships, factories and tractors. Consumers do not directly consume capital goods.

Consumer goods

: goods that are used directly by consumers to generate satisfaction. Compare with capital goods.

Production Possibility Curves

are used by economist to show the concepts of scarcity, choice and opportunity cost, among other this. It shows the maximum combinations of goods and service that can be produces by an economy in a giver time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

Production Possibility Frontier

the boundary between attainable and unattainable levels of production.

Allocative Efficiency

the situation that occurs when no resources are wasted—where no one can be made better off without making someone else worse off.

Technical Efficiency

the situation where it is impossible for a firm to produce, with the given know how, a larger output from the same inputs or the same output with less of one or more inputs without increasing the amount of other inputs.

Pareto Efficiency

the situation where one person cannot be better off without making someone else worse off.

Pareto Optimal

when a market is in equilibrium, with no external influences and with no external effects.

Marginal Rate of Transformation

the rate at which one good must be sacrificed in order to produce a single extra unit of another good, assuming that both goods require the same scarce inputs.

Actual Output

the amount of a product that a production facility actually produces, as opposed to the amount that it could produce if it were the run at full theoretical capacity determining the output gap, in an important step in identifying sources of waste or defect that can be targeted for process improvement.

Potential Output

the gross domestic product (GDP) that could be produced by an economy if all its resources were fully employed.

Economic Growth

the value of all goods and services produced in an economy in a given time period.

Development

a process to improve the lives of all the people in a country. This involves not only raising living standards i.e. the production of foods and services but the promotion of self esteem, dignity and respect and the enlarging of peoples freedom to choose and to take control of their own lives.

Merit Goods

a good that is recognised as socially desirable. As it has positive externalities it will be underprovided in a few market.

Demerit Goods

the opposite of a merit good, one, which the political process had decided, is socially undesirable.

Rationing System

the opposite of a merit good, one, which the political process had decided, is socially undesirable.

Mixed Economy

: an economy system in which the decision on how resources should be used is made partly by the private sector and partly by the government.

Free Market Economy

a system in which individuals own the factors of production and make economic decision through free interaction.

Command (Planned) Economy

a system in which the government controls the factors of production and makes all decision about their use and about the distribution of income.

Economy In Transition

an economy transitioning from being predominantly planned to free market or mixed economy.

Market

an abstract concept concerning all the arrangements that individuals have for exchanging with one and other.

Perfect Competition

a market structure in which the decisions of buyers and sellers have no effect on market price.

Monopoly

a market structure with high barriers to entry where one firm dominates the entry.

Oligopoly

a market type in which small numbers of producers compete with each other.

Monopolistic Competition

a market type in which a large number of firms compete with each other by making similar buy slightly different goods or services.

Buyers

a party, which acquires, or agrees to acquire, ownership (in case of goods), or benefit of usage (in case of services), in exchange for money or other consideration under a contract of sale.

Sellers

a party that makes offers or contracts to make a sale to an actual or potential buyer.

Barriers To Entry

barriers that make it difficult for firms to enter an industry and offer competition to existing producers or suppliers.

Homogenous

goods or services either physically identical or viewed as identical to buyers.

Price Taker

a firm that cannot influence the price of its output such as agricultural products, metals and energy goods.

Price Maker

when a firm can determine it's own price versus price TAKERS, where the firms in the industry must all have the price from the industry

Demand

the quantity of a good or service that consumers are willing and able to consume at a given price during a given period of time.

Law Of Demand

as the price of a product falls, the quantity demanded of the product will usually increase.

Demand Curve

a graph showing the relationship between the quantity demanded of a good or service and its price, holding everything else constant.

Determinants Of Demand

the factors the determine demand and lead to an actual shift of the demand curve to either the right or the left such as income and the price of other products.

Shift In The Demand Curve

the effect income and price of other products have on a product's demand curve.

Indirect Tax

a tax imposed on spending.

Value added tax

The value of a firms output minus the value of inputs bought from other firms.

Goods And Services Tax

an example of the value added tax—a Canadian tax levied on most goods and services sold for domestic consumption paid by consumers and levied in order to provide revenue for the federal government.

Subsidy

a payment made by the government to producers of foods and services.

Complements

two goods are considered complements if a change in the price of one causes and opposite shift in the demand for the other. For example: if the price of computers goes up, the demand for computer game will fall; if the price of computer goes down, the demand for computer games will increase.

Substitutes

a good or service that may be used in place of another.

Supply

the quantity producers are willing and able to produce at a given price during a given period of time.

Supply Curve

a graph showing the relationship between the quantity supplied and the price of a good or service, holding everything else constant.

Law Of Supply

as the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus.

Determinants Of Supply

the factors that determine supply and lead to an actual shift of the supply curve to either the right or the left such as the costs of factors of products and the price of other products, which the produces could produce instead of the existing product (the opportunity cost).

Shift Of The Supply Curve

the effect that the cost of factors of products and the price of other products that could be produced instead of the existing product have on the product's supply curve.

Movement Along The Supply Curve

a change in the price of the good itself.

Price Signal

message sent to consumers and producers the form of a price charged for a commodity, this is seen as indicating a signal for producers to increase supplies and/ or consumers to reduce demand.

Price Incentive

anything that reduces the cost of an item in order to make it more attractive for consumers to purchase and to send a message to the producers to decrease the supply as revenue decreases.

Resource Allocation

the assignment of resources to specific uses i.e. determining what will be produced, how it will be produce, and for whom it will be produced.

Equilibrium

situations in which the plans of buyers and sellers exactly coincide so that there is no excess supply or excess demand.

Market Clearing Price

: the price that clears the market where there is no excess quantity demanded or supplied and the price at which the demand curve intersects the supply curve.

Price Control

a government regulation of free market prices such that a legal maximum price is specified.

Maximum Price

the situation where the government sets a price below the equilibrium price, preventing the producers from raising the price above it in order to protect consumers. Also known as ceiling price.

Minimum Price

the situation where the government sets a price above the equilibrium price preventing the price to fall below this level in order to protect the producers. Also known as a floor price.

Price Support

a situation where the government intervenes in a market to stabiles prices

Buffer Stock Scheme

an organisation, usually run by producers or the government, that attempts to smooth out fluctuations in prices and hence producer incomes by the purchase and sale of stocks.

Commodity Price Agreement

when different countries work together to operate a buffer stock scheme for a particular commodity.

Elasticity

a measure of the responsiveness of one variable to a change in another.

Price Elasticity Of Demand

the responsiveness of quantity demanded of a good to a change in its price.

Inelastic

a change in price of the product leads to a smaller change in the quantity demanded of it.

Elastic

a change in the price of the product leads to a greater change in the quantity demanded of it.

Unitary

a change in the price of the product leads to the same change in the quantity demanded of it.

Cross Price Elasticity of Demand

the percentage change in the demand for one good divided by the percentage change in the price of a related good. Cross-price elasticity of demand is a measure of the responsiveness of one goods quantity demanded to changes in a related goods price.

Income Elasticity of Demand

the responsiveness of quantity demanded of a good to change in incomes.

Price Elasticity of Supply

a measure of how much the supply of a product changes when there is a change in the price of the product.

Total Revenue

the amount received from the sale of a good or service. It equals the price of the good or service multiplied by the quantity sold.

Primary Sector

extracts or harvests products from the earth. This includes production of raw material and basic goods such as agriculture, mining, forestry farming, grazing, and fishing.

Secondary Sector

manufactures construction-finished goods. All of manufacturing, processing and construction lie within this sector such as metal working and smelting, automobile production, textile production, chemical and engineering industries and aerospace manufacturing.

Tertiary Sector

the service industry. IT provides services to the general population and to businesses. This includes retail and wholesale sales, transportation and distribution, entertainment and restaurants.