Economics for the IB Diploma

Flashcards covering key economic terms and concepts from the Oxford IB Study Guides Economics for the IB Diploma, 2nd edition by Constantine Ziogas. Designed for Higher and Standard Level students to review lecture notes and prepare for exams. Covers Foundations of Economics, Microeconomics, Macroeconomics, International Economics, Development Economics, and Quantitative Issues.

Scarcity

The fundamental problem that all societies face, referring to the excess of human wants over what can actually be produced due to limited resources.

Opportunity cost

The value of the next best alternative sacrificed when a choice is made.

Resources (Factors of Production)

All inputs used in the production of a good or service, typically separated into land and raw materials, labour, capital, and entrepreneurship.

Land and raw materials (Natural Resources)

Inputs into production provided by nature, such as agricultural land, forests, mineral deposits, oil, and natural gas, which are limited and can be non-renewable or renewable.

Labour (Human Resources)

All forms of human input, both physical and mental, into current production; the workforce is limited in number and skills.

Capital (Physical Capital)

Manufactured resources; goods used to produce other goods, such as factories, machines, tools, and other equipment. Distinct from money in economic terms.

Entrepreneurship

The willingness and ability of certain individuals to take risks and to mobilize the remaining factors of production for a new venture.

Natural Capital

Natural resources that can be improved upon or depleted, closely linked to the concept of sustainability.

Sustainability

The idea of preserving and even increasing or improving upon the available stock of natural resources, defined as meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Human Capital

The education, training, and skills embodied in the labour force of a country, leading to increased productivity.

Social Sciences

Disciplines that systematically study human behaviour from different perspectives, including economics, psychology, anthropology, political science, sociology, and history.

Models

Simplified representations of reality, constructed to study a phenomenon, explain past observations, and predict future ones.

Normative Economic Statements

Value judgments, opinions, and statements that cannot be falsified or proven right or wrong, often containing phrases like 'ought to be' or 'should be'.

Positive Economic Statements

Statements that can be falsified or proven right or wrong, at least in principle, and tested against facts or data.

Economic Goods

Goods and services that require scarce resources to be sacrificed for their production.

Free Goods

Goods that have a zero opportunity cost of production, such as sea water and air, not to be confused with goods available at a zero price if scarce resources were used.

Competitive Market

A market with very many small firms, where the good is homogeneous, and nothing prevents entry or exit of firms.

Ceteris Paribus

A Latin phrase meaning 'all other things remaining constant'.

Rationality

In economics, it implies purposeful behaviour, specifically utility-maximizing consumers and profit-maximizing firms.

Economic System

The institutional framework within which economic activity takes place, determining how a society answers the three fundamental questions (what, how, for whom).

Market Economy

An economic system where households and firms, acting in their own self-interest through market interaction, answer the three fundamental questions.

Command Economy

An economic system where the state provides the answers to the three fundamental questions.

Mixed Economy

An economic system where both markets and the state provide the answers to the three fundamental questions.

Market

A mechanism that provides answers to the three fundamental questions by facilitating interaction between buyers and sellers.

Market Failure

A situation where the market mechanism fails to provide the best possible answers for society to the fundamental questions, creating a role for government intervention.

Government Failure

A situation where government intervention to correct market failure does not necessarily lead to better outcomes.

Production Possibilities Curve (PPC) / Production Possibilities Frontier (PPF)

The first economic model, illustrating scarcity, attainable and unattainable choices, opportunity cost, efficiency, and growth for an economy with fixed resources producing two goods.

Unattainable Output Combinations

Combinations of output represented by points outside the PPC, which cannot be produced given available resources and technology.

Inefficient Output Combinations

Combinations of output represented by points inside the PPC, indicating that available resources are not fully utilized (e.g., unemployment).

Efficient Output Combinations

Combinations of output represented by points on the PPC, indicating full utilization of scarce resources without waste, where more of one good cannot be produced without sacrificing another.

Negative Slope of PPC

Reflects that producing more of one good requires diverting resources from another, implying an opportunity cost.

Bowed PPC (Concave to the Origin)

Indicates increasing opportunity cost, meaning ever-increasing amounts of one good must be sacrificed to produce more and more units of another, due to specialized resources.

Linear PPC (Straight Line)

Reflects constant opportunity costs, implying resources are perfectly substitutable.

Economic Growth (PPC)

Shown through an outward shift of the PPC, implying that previously unattainable combinations of output can now be produced due to more/better resources and/or improved technology.

Unemployment (PPC)

Implies the economy is producing inside its PPC, as labour resources are not fully utilized.

Choice (PPC)

Illustrated by a society's ability to choose any combination of output on its PPC, or move along the curve if preferences change.

Efficiency (PPC)

Shown at all points on the PPC, reflecting full use of available resources given available technology without waste.

Inefficiency (PPC)

Shown at all points inside the PPC, implying wasted (idle or unemployed) resources.

Opportunity Cost (PPC)

Movement from one point on the PPC to another means more of one good is produced at the cost of less of the other, with the slope of the PPC indicating this cost.

Constant Opportunity Cost (PPC)

A linear PPC reflecting that producing more units of one good always requires the same amount of the other good to be sacrificed.

Increasing Opportunity Cost (PPC)

A concave PPC showing that to produce equal extra units of one good, increasing amounts of the other good must be sacrificed.

Microeconomics

The branch of economics concerned with individual parts of the economy, focusing on demand and supply of particular goods, services, and resources in individual markets.

Market

An institution that permits interaction between buyers and sellers, acting as a mechanism to allocate scarce resources.

Demand

The behaviour of buyers in a market; the inverse relationship between various possible prices and the corresponding quantities consumers are willing and able to purchase per time period, ceteris paribus.

Law of Demand

States that if the price of a good rises, the quantity demanded per period will fall, ceteris paribus, due to the inverse relationship between price and quantity demanded.

Demand Curve

A graphical representation showing the inverse relationship between the price per unit of a good (vertical axis) and the quantity of the good demanded per period (horizontal axis).

Market Demand Curve

The horizontal summation of all individual demand curves, representing the total quantity demanded by all consumers at each price.

Consumers' Utility

The satisfaction derived from consuming a good or bundle of goods, which typical consumers try to maximize within their budget.

Substitution Effect

If the price of good X increases, all other goods become relatively cheaper, leading consumers to substitute other goods for X.

Income Effect

If the price of good X increases, the purchasing power of consumers decreases, reducing their ability to afford X.

Normal Good

A good for which an increase in income leads to an increase in its demand (or income and demand change in the same direction).

Inferior Good

A good for which an increase in income leads to a decrease in its demand (or income and demand change in opposite directions).

Complements

Two goods considered complements if they are often consumed together, where an increase in the price of one leads to a decrease in demand for the other.

Substitutes

Two goods considered substitutes if they are in competitive consumption and satisfy the same need, where an increase in the price of one leads to an increase in demand for the other.

Shifts of Demand Curve

Occur when any determinant of demand other than the price of the good changes, causing the entire demand curve to move right (increase) or left (decrease).

Movements Along a Demand Curve

Occur when the price of the good changes, resulting in a change in quantity demanded but no shift of the demand curve itself.

Supply

The behaviour of producers (firms) in a market; the direct relationship between various possible prices and the corresponding quantities that firms are willing to offer per period, ceteris paribus.

Law of Supply

States that if the price of a product increases, the quantity supplied per period is expected to increase, due to the direct relationship between price and quantity supplied.

Supply Curve

A graphical representation (typically upward sloping) showing the direct relationship between the price per unit of a good (vertical axis) and the quantity supplied per period (horizontal axis).

Market Supply Curve

The horizontal summation of the supply curves of individual firms, representing the total quantity offered by all firms at each price.

Cost of Factors of Production (Supply Shift Factor)

Changes in input prices (e.g., wages, raw materials) affect supply; an increase in input prices decreases supply (shifts curve left).

Technology (Supply Shift Factor)

Improved technology decreases the cost of production, increasing supply (shifts curve right).

Productivity (Supply Shift Factor)

Output per unit of input (e.g., labour productivity); an increase in productivity decreases production costs, increasing supply (shifts curve right).

Government Policy (Supply Shift Factor)

Indirect taxes (decrease supply) and subsidies (increase supply) affect production costs and shift the supply curve.

Indirect Tax

A payment to the government by firms per unit of output produced, increasing production costs and decreasing supply.

Subsidy

A payment to firms by the government per unit of output produced, decreasing production costs and increasing supply.

Jointly Supplied Goods (Supply Shift Factor)

If producing one good automatically produces another (e.g., mutton and wool), an increase in the price of one increases the supply of the other.

Competitive Supply Goods (Supply Shift Factor)

Goods that can be produced using the same fixed resources (e.g., lemons and oranges on the same land); an increase in the price of one decreases the supply of the other.

Size of the Market (Supply Shift Factor)

An increase in the number of firms in a market tends to increase supply (shifts curve right).

Expectations (Supply Shift Factor)

Expectations of future price changes can affect current supply (e.g., expected higher future prices may decrease current supply).

Weather Conditions (Supply Shift Factor)

Significant factor affecting the supply of farm products; adverse conditions decrease supply (shifts curve left).

Shifts of Supply Curve

Occur when any determinant of supply other than the price of the good changes, causing the entire supply curve to move right (increase) or left (decrease).

Movements Along a Supply Curve

Occur when the price of the good changes, resulting in a change in quantity supplied but no shift of the supply curve itself.

Equilibrium Price

The price at which quantity demanded per period is equal to quantity supplied, resulting in neither excess demand nor excess supply (the market 'clears').

Equilibrium Quantity

The quantity corresponding to the equilibrium price when the market 'clears'.

Excess Supply

A situation where quantity supplied per period exceeds quantity demanded at a given price, leading to pressure for the price to fall.

Excess Demand

A situation where quantity demanded per period exceeds quantity supplied at a given price, leading to pressure for the price to rise.

Signalling Function of Prices

Changes in market price communicate information to producers and consumers about excess demand or supply.

Incentive Function of Prices

Changes in market price provide incentives for firms and consumers to adjust their behaviour based on profitability or affordability.

Rationing Function of Prices

In a free market, prices allocate goods to those who are willing and able to pay the market-determined price.

Consumer Sovereignty

The idea that in a free competitive market, changes in consumer preferences (voting with dollars) induce changes in the quantity produced and allocation of scarce resources.

Equilibrium Price (Increase in Demand)

An increase in demand typically leads to a higher equilibrium price, assuming typical supply curves.

Equilibrium Quantity (Increase in Demand)

An increase in demand typically leads to a greater equilibrium quantity, assuming typical supply curves.

Equilibrium Price (Decrease in Demand)

A decrease in demand typically leads to a lower equilibrium price, assuming typical supply curves.

Equilibrium Quantity (Decrease in Demand)

A decrease in demand typically leads to a smaller equilibrium quantity, assuming typical supply curves.

Equilibrium Price (Increase in Supply)

An increase in supply typically leads to a lower equilibrium price, assuming typical demand curves.

Equilibrium Quantity (Increase in Supply)

An increase in supply typically leads to a greater equilibrium quantity, assuming typical demand curves.

Equilibrium Price (Decrease in Supply)

A decrease in supply typically leads to a higher equilibrium price, assuming typical demand curves.

Equilibrium Quantity (Decrease in Supply)

A decrease in supply typically leads to a lower equilibrium quantity, assuming typical demand curves.

Consumer Surplus

The difference between how much consumers are willing and able to pay at most for some amount of a good and what they actually end up paying; graphically, the area below the demand curve and above the price line.

Marginal Benefit (MB)

The vertical distance to a demand curve, measuring the extra benefit enjoyed from consuming that unit.

Producer Surplus

The difference between what firms earn from selling some amount of a good and the minimum they would require to be willing to offer this amount; graphically, the area above the supply curve and below the price line.

Marginal Cost (MC)

The vertical distance to a supply curve, representing the minimum a firm requires to be willing to offer that specific unit, which is the cost of producing that extra unit.

Social/Community Surplus

Defined as the sum of consumer surplus and producer surplus, serving as a measure of welfare.

Allocative Efficiency

Achieved when the optimal amount of a good is produced and consumed from society's point of view, meaning that marginal benefit (MB) equals marginal cost (MC) for the last unit produced (P = MB = MC).

Elasticity

The responsiveness of some economic variable when another economic variable changes.

Price Elasticity of Demand (PED)

The responsiveness of quantity demanded to a change in price, measured as the percentage change in quantity demanded divided by the percentage change in price, typically treated as a positive number.

Price Elastic Demand (PED > 1)

Demand is price elastic if the percentage change in quantity demanded is larger than the percentage change in price.

Price Inelastic Demand (0 < PED < 1)

Demand is price inelastic if the percentage change in quantity demanded is smaller than the percentage change in price.

Unit Elastic Demand (PED = 1)

Demand is unit elastic if the percentage change in quantity demanded is equal to the percentage change in price.