Economics Ultimate Glossay

IB Economics SL + HL terms and definitions

economic profit

firm’s total revenue minus total economic costs (explicit plus implicit)

explicit costs

• costs of production that involve money payment by a firm to an outsider to acquire a factor of production not owned by the firm

implicit costs

• costs of production that are opportunity costs from using self-owned resources by a firm (ex. salary the owner could’ve gotten if they worked for someone, rent that could’ve earned if the owner rented out their property instead)

costs of production

• total opportunity costs of a firm to acquire resources for production

• includes explicit and implicit costs

opportunity costs

• value of next best alternative that is sacrificed to obtain something else

abnormal profit (supernormal profit)

• positive economic profit

• when total revenue is greater than total costs

normal profit

• when economic profit is zero;

• minimum amount of revenue that a firm must receive so that it keeps the business running;

• amount of revenue needed to cover implicit costs

break-even point

• total revenue = total cost

break-even price

• price at which total revenue=total cost

loss

• negative economic profit;

• when economic costs are greater than revenue

absolute advantage

• the ability of a country to produce a good using fewer resources than another country;

• the ability of a country to use the same amount of resources as another country but produce more than it

absolute poverty

• inability of an individual or a family to afford a basic standard of goods and services

• those earning below the ‘poverty line’ which determines the minimum income that can sustain a family in terms of its basic needs

actual growth

• when previously unemployed factors of production are brought in to use

• point within the PPC curve moves nearer to the PPC curve

adverse selection

• transaction that happens when seller and buyer do not have same information

ad valorem taxes

• taxes that are fixed percentages of a price of a good or service

• increases as price of good or service increases

administrative barriers

• type of trade protection using administrative procedures to prevent free flow of imports into a country

aggregate demand

• total spending of an economy

• includes investments, government expenditure, consumption, and net export

aggregate supply

• total quantity of domestic goods and services produced in an economy over a particular time period

Resource allocation

• assigning available resources and factors of production to specific uses

allocative efficiency

• level of output where marginal costs = average revenue

• selling of last unit at the price it cost to make it

• socially optimum level of output

dumping

• selling a good in international markets at a price below cost of producing it

anti-dumping

• justifies trade protection policies is a country’s trading partner is practicing dumping

• to limit quantities of dumped goods

anti-monopoly regulation

• policies that regulate the market share of one company to promote competition

appreciation

• increase of one country’s currency in terms of another country’s currency in a floating exchange rate system

asymmetric information

• when one party of an economic transaction has more or better quality information than the other

automatic stabilizers

• factors that automatically stabilize the economy and reduce short-term fluctuations

• ex: progressive tax; unemployment benefits

balance of payments

• value of all transactions made by residence of a country with residents of all other countries over a period of time

balance of trade in goods

• part of balance of payment

• value of exports - imports

balance of trade in services

• part of balance of payments

• exports of services minus the imports of services

balance on capital account

• sum of inflows - outflows of funds in the capital account

capital account (not super important z)

• measure of the buying and selling between countries

• assets separated by ownership and lending

current account balance

• sum of inflows - outflows of funds in the current account

current account

• (exports-imports of goods and services) + inflows-outflows of income + current transfers

current account deficit

• current account balance is negative

current account surplus

• current account balance is positive

balance on financial account

• sum of inflows of funds - outflows in the financial account

financial account

• inflows - outflows of fund due to FDI, portfolio investments, and changes in reserve assets

balanced budget

• government’s budget

• government tax revenue = government expenditures over a specific period of time

barriers to entry

• anything that prevents a firm from entering an industry and beginning production

bilateral trade agreement

• a trade agreement that involves two trading partners

budget deficit

• government tax revenue < government expenditures (over a specific period of time)

budget surplus

• government tax revenue > government expenditure (over a specific period of time)

bounded rationality

• consumers and business do not have enough information to make fully-rational decisions

• satisfaction > utility maximization

bounded self-control

• consumers do not stop consuming even if it is sensible to do so

business cycle

• fluctuations in the growth of real GDP over time

• there are periods of contraction and expansion

cap and trade scheme

• government sets a limit on the aount of pollutatnts that can be legally emitted by a firm

• if want to pollute more, buy permits

• if want to pollute less, sell permits

capital

• factor of production that comes from investing in physical capital (factories, roads, machines, etc.) and human capital (value that workforce brings)

capital flight

• money and assets flow out of country to seek a “safe haven”

capital transfer

• monetary movement gained or lost by transfer of goods and financial assets by migrants entering or leaving country

Circular economy

• economic system that focuses on three principles: design out waste, keep products and materials in use, and regenerate natural systems

Coase theorem

• if there is a conflict due to assigned property rights, two parties can bargain about who will own the property no matter who initially owned it

closed economy

• an economy that has no international trade

collusion

• agreement among firms to fix prices or divide the market between them

• to limit competition and maximize profit

collusive oligopoly

• collusion in oligopolies

common access resources

• resources that are not owned by anyone, do not have a price, and are available for anyone’s use without payment

• can be depleted or degraded

custom unions

• trade freely among themselves

• common trade barrier

common market

• type of trading bloc

• for countries under custom union

• remove any remaining trade barriers between them

comparative advantage

• a country has a lower opportunity cost when producing a good than another country

concentration ratio

• measure of how much an industry’s production is concentrated among industry’s largest firms (percentage)

concessional loan

• loan offered as part of foreign aid

• low interest rate

• long repayment periods

consumer nudges

• positive reinforcements and indiret suggestions to influjence decision making of consumers

consumer price index (CPI)

• measure of average rate of inflation through the change in the price of a representative basket of goods and services purchased by the average consumer

consumer surplus

• additional benefit consumers have by paying less than what they were willing to or able to

consumption

• spending by households on goods and services over a period of time

contractionary fiscal policy

• fiscal policy that decreases government spending or increase taxes to decrease aggregate demand

contractionary monetary policy

monetary policy that decreases money supply and increases interest rate to decrease aggregate demand

corporate social responsibility

• pratice of some firms to reduce socially undersirable activities and increase socially desirable activities

credit items

• payments received from other countries

• is positive value

• inflow of foreign exchange

credit creation

• when commercial banks expand the bank deposit to increase money supply

crowding out

• increased government spending

• spending exceeds recenue

• government borrows from central bank

• central bank increases interest rate which affects commercial banks

• crowding out of firms and consumers

cyclical unemployment

• type of unemployment

• during downturn of business cycle

• economy is in a recessionary gap

• low aggregate demand but wages do not fall to compensate that