Ib economics 2.1 - competitive markets, demand and supply

Asked chatgbt to clean up the glossary and make flashcards with the terms

Economics

The study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants.

Scarcity

The limited availability of economic resources relative to society’s unlimited needs and wants of goods and services.

Choice

The decision made by economic agents about how to allocate scarce resources to alternative uses.

Ceteris paribus

A Latin expression meaning “other things being equal”.

Opportunity cost

The next best alternative foregone when an economic decision is made.

Factors of production

Resources used in the production of goods and services; include land (natural resources), labour, capital and entrepreneurship.

Land

One of the four factors of production that refers to the natural resources with which an economy is endowed; also referred to as “gifts of nature”.

Labour

One of the four factors of production that refers to the physical and mental contribution of workers to the production process.

Capital

Physical capital refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. Human capital refers to the education, training, skills and experience embodied in the labour force of a country.

Entrepreneurship

Refers to the ability of certain individuals to organize the other factors of production (land, labour, capital) and their willingness to take risks.

Goods

Tangible products that satisfy human needs and wants.

Services

Intangible products that satisfy human needs and wants.

Market

Any arrangement where buyers and sellers interact to carry out an economic transaction.

Competitive market

A market with many firms acting independently where no firm has the ability to control the price.

Demand

The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.

Demand curve

A curve illustrating the relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus. It is normally downward sloping.

Law of demand

A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus.

Supply

Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.

Supply curve

A curve showing the relationship between the price of a good or service and the quantity supplied, ceteris paribus. It is normally upward sloping.

Law of supply

A law stating that as the price of a good rises, the quantity supplied will rise over a certain period of time, ceteris paribus.

Market equilibrium

In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.

Excess demand

Occurs when quantity demanded at some price is greater than quantity supplied.

Excess supply

Occurs when quantity supplied at some price is greater than quantity demanded.

Market-clearing price

The price at which quantity demanded equals quantity supplied; there is no shortage or surplus.

Price mechanism

The system in which the forces of demand and supply determine the prices of products. Also known as the market mechanism.

Consumer surplus

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.

Producer surplus

The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive.

Social/community surplus

The sum combination of consumer surplus and producer surplus.

Equilibrium

A state of balance that is self-perpetuating in the absence of any outside disturbance.

Substitutes

Goods that can be used in place of each other, as they satisfy a similar need.

Complements

Goods that are jointly consumed, for example, coffee and sugar.

Normal goods

A good where the demand for it increases as income increases.

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.

Competitive supply

When goods that a firm is producing use the same resources in their production process. The goods thus compete with each other for the use of the same resources.

Joint supply

Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other.

Productive efficiency

A situation where output is produced at the lowest possible cost.

Allocative efficiency

Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).

Allocative inefficiency

When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results (MSB ≠ MSC).