IB Economics

Important microeconomic + macroeconomic definitions

Aggregate demand

total spending on domestic goods and services at different price levels in a period (AD = C + I + G + (X - M)

Aggregate supply

total quantity of goods and services domestic firms are willing and able to supply at different price levels in a period

Automatic stabilizers

institutionally built-in features (like unemployment benefits) that help the short-term fluctuations of the business cycle without direct government intervention

Cost push inflation

inflation caused by an increase in costs of factors of production, resulting in a leftwards shift of the SRAS curve

Deflation

a sustained decrease in the average price levels of an economy, over a certain period of time

Economic development

sustained increase in living standards; higher levels of income should lead to better access to goods/services, education, healthcare, and living environment

Fiscal policy

policy targeted to influence demand by using a change in government spending and/or direct taxation to achieve economic objectives

Monetary policy

policy set by the central bank targeted to influence demand through changes in money supply or interest rates to achieve economic objectives

Gross domestic product (GDP)

The final value for all goods and services produced in an economy over a certain period of time

Gross national income

sum of GDP + net national income from abroad

Keynesian multiplier

the idea that an increase in any injection will lead to a greater increase in real GDP due to additional income created through rounds of spending

Long-run aggregate supply

aggregate supply that only depend on resources and technology of an economy, independent of price level; the output of an economy operating at full employment

Short-run aggregate supply

the total supply of goods and services produced in an economy at different price levels at a given time

Multidimensional poverty index

measures poverty in three ways: health (child mortality, nutrition), education, and living standards (electricity, water)

Phillips curve

Curve showing the inverse relationship between unemployment and the rate of inflation

Poverty

Inability to satisfy basic consumption needs

Absolute poverty

a situation where people don’t have the income necessary to meet basic human needs (food, water, shelter, etc.)

Relative poverty

a situation where people have a household income of less than the median income in a certain country/region affecting the standard of living

Recession

A sustained period of negative GDP growth for more than two consecutive quarters

Transfer payments

Payments from the government to an individual in which nothing is exchanged in return; used to redistribute income

Unemployment

when individuals who are willing and able to work actively seek a job, but are unable to

Lorenz curve

curve showing what percentage of the total population owns what percentage of the total income in an economy

Average tax rate

the ratio of the tax paid by an individual over their income, expressed as a percentage

Marginal tax rate

the proportion of a person’s additional income that is paid in tax expressed as a percentage

Interest rates

the cost of borrowing money or reward for saving money over a period of time, expressed as a percentage

Business cycle

short-term fluctuations of real GDP around its long-term trend (potential output; LRAS)

Natural rate of unemployment

rate of unemployment that occurs when an economy is producing at its potential output or full employment; equal to sum of frictional, seasonal, and structural unemployment NOT cyclical

Allocative efficiency

achieved when scare resources are allocated in the best possible way for society with the lowest cost (MSB = MSC)

Carbon taxes

a Pigouvian tax placed on carbon emmisions from firms using fossil fuels for production

Ceteris paribus

“all other things equal”

Demerit goods

Goods that harm individuals and society when consumed; typically over allocated/over consumed

Excess demand

when quantity demanded at some price is greater than quantity supplied (shortage)

Excess supply

when quantity supplied at some price is greater than quantity demanded

Income elasticity (YED)

responsiveness of demand for a good/service to change in income (typically proportional)

Cross-price elasticity (XED)

responsiveness of demand for a good/service to a change in the price of another good

Marginal benefit

extra benefit enjoyed by consumers from consuming one more unit of output

Marginal cost

extra cost of producing one more unit of output

Merit goods

goods/services beneficial to individuals or society when consumed; typically under allocated/under consumed

Negative externality of consumption

negative effects suffered by third parties not considered/compensated for when a good/service is consumed

Negative externality of produced

negative effects suffered by a third part not considered/compensated for when a good/service is produced

Positive externality of consumption

beneficial effects enjoyed by third parties not considered when a good/service is consumed

Positive externality of production

beneficial effects enjoyed by third partied not considered when a good/service is produced

Price ceiling

a maximum price set below equilibrium price by the government (cannot rise above) to keep prices affordable

Price floor

a minimum price set above equilibrium price by the government (cannot fall below) to help producers

Price elasticity of demand (PED)

responsiveness of quantity demanded for a good/service to a change in price

Price elasticity of supply (PES)

responsiveness of a quantity supplied for a good/service to a change in price

Subsidy

an amount of money per unit given by the government to encourage production of merit goods (lower price for consumers)

Tradable permits

permits to pollute issued by the government that can be traded (bought + sold); also sets max amount of pollution allowed

Welfare loss

a loss part of social surplus when there is a market failure and resources are not allocated efficiently (MSB x= MSC)

Market failure

when the price mechanism fails to allocate scare resources in an efficient way leading to a social welfare loss for society

Market equilibrium

when quantity supplied is equal to quantity demanded at the prevailing market price

Normal good

good where demand increases as consumer income increases

Inferior goods

good where demand decreases as consumer income increases

Gini coefficient

a statistical measure of income inequality in an economy/country (0 = perfect income inequality; 1 = perfect income equality)

Cyclical unemployment

occurs when economy is producing below potential and full employment due to insufficient demand of goods/services

Supply-side policies

market-based or interventionist government policies to increase the productive capacity and efficiency of an economy/country