IB Economics: Microeconomics and Macroeconomics

Comprehensive vocabulary flashcards covering microeconomic fundamentals, elasticity, market equilibrium, national income accounting, aggregate demand, and aggregate supply models.

Economics

The study of how society allocates scarce resources to satisfy unlimited human wants.

Opportunity Cost

The highest value alternative foregone for the option chosen in a decision-making situation.

Factors of Production

The resources used to produce goods and services, consisting of land (earning rent), labour (earning wages), capital (earning interest), and enterprise/entrepreneurship (earning profit).

Economic Goods

Products that are produced using scarce resources and therefore have an opportunity cost.

Free Goods

Goods that are not scarce, require no resources to produce, and have no opportunity cost (e.g., air, sea water).

Production Possibility Curve (PPC)

A model showing the maximum combination of two goods an economy can produce when all resources are fully and efficiently employed at a given point in time.

Productive Efficiency

A state achieved when output is produced at the lowest possible cost, represented by any point situated directly on the Production Possibility Curve.

Positive Economic Statement

An objective statement that can be tested and proven true or false based on empirical evidence.

Normative Economic Statement

A value judgment or opinion about what ought to be that cannot be proven true or false by empirical evidence.

Law of Demand

The principle stating there is an inverse causal relationship between the price of a good and the quantity demanded, ceteris paribus.

Real Income Effect

The increase in quantity demanded that occurs when a fall in price raises consumers' purchasing power, enabling them to buy more output with a given income.

Substitution Effect

The increase in quantity demanded that occurs when a fall in a good's price makes it relatively cheaper and offers greater satisfaction per unit of money compared to substitute goods.

Law of Diminishing Marginal Utility

The principle stating that as an individual consumes additional units of a good, the marginal utility (extra satisfaction measured in utils) derived from each successive unit decreases.

Substitute Goods

Alternative goods that can satisfy a similar want in place of another good; a rise in the price of one leads to an increase in demand for the other.

Complementary Goods

Goods that are consumed together; a rise in the price of one causes a decrease in demand for the other.

Normal Good

A good for which demand increases as consumer income rises, demonstrating a positive relationship between income and demand.

Inferior Good

A good for which demand decreases as consumer income rises, demonstrating an inverse relationship between income and demand.

Law of Supply

The principle stating there is a positive causal relationship between the price of a good and the quantity supplied, ceteris paribus.

Joint Supply

A production process that yields two or more goods simultaneously, such that increasing the supply of one directly causes an increase in the supply of the other.

Competitive Supply

A situation where a firm uses the same factors of production to produce alternative goods, such that increasing production of one reduces the supply of another.

Price Elasticity of Demand (PED)

A measure of the responsiveness of the quantity demanded of a good to a change in its price, calculated as $\text{PED} = \frac{\%\Delta Q_d}{\%\Delta P}$.

Competitive Market Equilibrium

The point where the quantity demanded equals the quantity supplied, establishing a market-clearing equilibrium price and output with no excess demand or supply.

Rationing Function of Price

The mechanism by which price adjusts to distribute scarce goods and services among consumers, eliminating shortages and surpluses.

Signalling Function of Price

The role of price changes in providing information to buyers and sellers that market conditions are changing.

Incentive Function of Price

The role of price changes in motivating economic agents to act, encouraging producers to maximize profit and consumers to maximize utility.

Allocative Efficiency

The production of the combination and quantity of goods and services most preferred by consumers, achieved where $MSB = MSC$, $P = MC$, or where social surplus is maximized.

Consumer Surplus

The difference between the maximum price a consumer is willing to pay for a good and the actual market price paid.

Producer Surplus

The difference between the market price a producer receives for a good and the minimum price they were willing to accept to supply it.

Community Surplus

The sum of consumer surplus and producer surplus in a market, also referred to as social surplus.

Circular Flow of Income Model

A macroeconomic model showing how income, output, and expenditure flow continuously between households, firms, and other economic sectors.

Leakages

Withdrawals of income from the circular flow of income, consisting of savings ($S$), taxes ($T$), and import expenditure ($M$).

Injections

Additions of spending into the circular flow of income, consisting of investment ($I$), government spending ($G$), and export revenues ($X$).

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within the geographic boundaries of a country over a given time period, usually one year.

Gross National Income (GNI)

The total income earned by a country's factors of production, regardless of where they are located, calculated as $\text{GNI} = \text{GDP} + \text{Net income from abroad}$.

GDP Deflator

A price index used to convert nominal GDP into real GDP, calculated via the relationship $\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP Deflator}} \times 100$.

Purchasing Power Parity (PPP)

A method used to adjust exchange rates so that a unit of currency has the same purchasing power as the US dollar, providing a more accurate international comparison of living standards.

Business Cycle

Fluctuations in actual economic activity (real GDP) over time, characterized by alternating phases of expansion, peak, contraction, and trough around the potential output trend.

Recession

A period of negative economic growth defined specifically as two consecutive quarters (six months) of declining real GDP.

OECD Better Life Index

An alternative measure of national well-being that compares countries across 11 dimensions of material conditions and quality of life, allowing users to apply custom weights.

Aggregate Demand (AD)

The total planned spending on domestic goods and services at different average price levels over a given time period, given by the formula $AD = C + I + G + (X - M)$.

Short Run (Macroeconomic Model)

The period of time during which resource prices, particularly nominal wages, are fixed due to labour contracts.

Long Run (Macroeconomic Model)

The period of time during which resource prices, particularly nominal wages, are fully flexible and adjust to changes in the average price level.

Short-Run Aggregate Supply (SRAS)

The total planned output that domestic firms are willing and able to produce at different average price levels over a given time period when resource prices are fixed.

Long-Run Aggregate Supply (LRAS)

A vertical aggregate supply curve positioned at potential output ($Y_F$), representing total output supplied when resource prices are flexible.

Potential Output

The full-employment level of real output ($Y_F$) produced when an economy operates at its natural rate of unemployment.

Deflationary Gap

A macroeconomic condition where actual output is less than potential output ($Y_2 < Y_F$), resulting in unemployment rising above the natural rate.

Inflationary Gap

A macroeconomic condition where actual output exceeds potential output ($Y_2 > Y_F$), resulting in unemployment falling below the natural rate and upward pressure on price levels.

Keynesian Aggregate Supply (AS) Curve

An aggregate supply curve consisting of three distinct sections (horizontal spare capacity, upward-sloping, and vertical full-capacity) based on the premise that nominal wages are sticky downwards.