IB Economics Unit 1 - Economic Foundations (HL)

Actual growth

Occurs when real output (real GDP) increases through time and is a result of greater or better use of existing resources. In the PPC model it can be illustrated by a movement from a point inside a PPC to another point in the northeast direction.

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.

Ceteris paribus

A Latin expression meaning "other things being equal".

Economics

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

Economic well-being

A multidimensional concept relating to the level of prosperity and quality of living standards in 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.

Equity

The concept or idea of fairness.

Factors of production

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

Foreign sector

In an open economy the term refers to exports and imports.

Free goods

Goods such as air or sea water that are not considered scarce and thus do not have an opportunity cost.

Free market economy

An economy where the means of production are privately owned and where market forces determine the answers to the fundamental questions (what/how much, how and for whom) that all economies face.

Growth in production possibilities

When the production possibilities of a country increase because of more/better resources and/or better technology becoming available; illustrated by a shift outwards of the PPC.

Households

Groups of individuals in the economy who share the same living accommodation, who pool their income and jointly decide the set of goods and services to consume.

Human capital

The education, training, skills, experience and good health embodied in the labour force of a country.

Income

A flow of earnings from using factors of production to produce goods and services. Wages and salaries are the factor reward to labour and interest is the flow of income for the ownership of capital.

Injections

Within the circular flow model these refer to spending on domestic output that does not originate from households and thus includes investment spending by firms, government expenditures and exports.

Keynesian revolution

An economic school of thought based upon the works of John Maynard Keynes, challenging the classical (laissez faire) viewpoint and advocating an interventionist role for the government in managing the level of aggregate demand and thus of economic activity.

Labour

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

Laissez faire

The view that if market forces are left alone unimpeded by government intervention the outcome will be efficient.

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".

Leakages

Income not spent on domestic goods and services. It includes savings, taxes and import expenditure.

Mixed economy

An economy that has elements of a planned economy and elements of a free market economy. In reality, all economies are mixed. What is different is the degree of the mix from country to country.

Monetarist/new classical counter revolution

An economic school of thought arguing that the price mechanism along with well-functioning competitive markets are sufficient to lead the economy to full employment. In this school of thought, government intervention is not necessary to manage the level of aggregate demand.

Normative economics

Deals with areas of the subject that are open to personal opinion and belief, thus not subject to refutation.

Opportunity cost

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

Planned economy

An economy where the means of production (land and capital) are owned by the state. The state determines what/how much to produce, how to produce, and for whom to produce.

Positive economics

Deals with areas of the subject that are capable of being falsified, or shown to be correct or not.

Potential output

Output produced by an economy when it is at full employment equilibrium, or long-run equilibrium according to the monetarist/new classical model.

Production possibilities curve (PPC)

A curve showing the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

Productive capacity

The greatest capability of an economy to produce, usually measured by maximum possible output of an economy.

Refutation

A method used in the natural sciences and social sciences where any proposition must be subjected to an empirical test in order to see if it can be disproven or refuted. If it is disproven or refuted, then the proposition must be rejected.

Resource allocation

Apportioning available resources or factors of production to particular uses for production purposes.

Scarcity

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

Social sciences

Academic studies of human societies and how people in society interact with each other.

Stakeholder

An individual or group of individuals who have an interest, or stake, in an economic activity or outcome.

Sustainability

Refers to the preserving the environment so that it can continue to satisfy needs and wants into the future. Relates to the concept of "sustainable development".

Utility

A measure of the satisfaction derived from consuming a good or service.

Circular flow of income

A simplified illustration that shows the flows of income and expenditures in an economy.

Say's Law

A proposition stating that the supply of goods creates its own demand.