Ib Economics Definitions Flashcards

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Ad valorem taxes

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An indirect tax where a given percentage is added to the price of the good or service.

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Allocative Efficiency

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Occurs where the maginal social cost of producing a good equals the marginal social benefit that the good brings to society. In other words it is where the marginal cost of producing a good is equal to the price it is charged to consumers (P=MC).

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Anti-Dumping

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Legislation to protect an economy against the importing of goods below its unit costs of production.

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Barriers to Entry

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Obstacles that prevent a new firm from entering a market, for example; economies of scale, product differentiation and legal protection.

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Break-even Price

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The price where average revenue is equal to average total cost. Below this price the firm will shutdown in the long run as it cannot cover its variable costs (labour).

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Business Cycle

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A diagram showing the periodic or cyclical fluctuations in economic activity. The business cycle shows that economies typically move through a pattern of economic growth with the phases; recovery, boom, slowdown, recession.

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Capital

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The factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment.

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Cartel

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A formal agreement among firms in a collusive oligopoly.

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Ceteris Paribus

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A latin term meaning "let all other things remain equal", term used by economists to develop economic theories/models.

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Collusive Oligopoly

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Where a few firms in an oligopoly act together to avoid competition by resorting to agreements to fix prices or output.

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Common Market

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A customs union with common policies on product regulation and free movement of goods, services, capital and labour.

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Complementary Good

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Goods used in combination with each other e.g printer and printer ink or digital camers and memory cards. Complementary goods have negative cross-price elasticity.

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Constant returns to scale

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A given percent increase in the quantity of all factors of production results in an equal percentage change in output and thus no change in long-run average costs.

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Consumer Surplus

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The additional benefit or utility received by consumers by paying a price that is lower than they are willing to pay.

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Consumption

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Spending by households on consumer goods and services.

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Credit

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Borrowed money.

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Cross-price elasticity of demand

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A measure of the responsiveness of the quantity one good demanded in response to a change in the price of another realted good.

Equation=

(%D in Qd of Good A)/(%D in Price of Good B)

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Crowding Out

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A situation where the government spends more than it receives in revenue and needs to borrow money, forcing up interest rates and "crowding out" private investment and private consumption.

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Decreasing Returns to Scale

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A given percentage increase in the quantity of all factors of production results in a smaller percentageincrease in output and thus an increase in long-run average costs (diseconomies of scale).

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Deflation

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A persistent fall in the average level of prices.

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Deflationary (recessionary) Gap

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The gap that occurs when macroeconomic equilibrium occurs at a level that is less than the full emplyoment level of output.

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Demand

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The quantity of a product that consumers are willing and able to buy at a given price in a given time period.

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Demand Curve

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A curve, or line showing the relationship between the price of a product and quantity demanded over a range of prices.

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Demand-side Policies

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Also known as demand-management policies, these are policies to change the level of aggregate demand (AD) in the economy deliberately in order to achieve macroeconomic objectives.

Fiscal Policy; tax rates and government spending

Monetary Policy; manipulation of interest rates and banks reserves

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Deregulation

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A type of supply-side policy where the government reduces the number or type of regulations governing the behaviour.

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Direct Tax

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Taxation imposed on people’s income or wealth, and on firms’ profits.

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Diseconomies of Scale

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An increase in average costs in the long run. As a result of poor communication, co-ordination problems, loss of management efficiency.

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Economic Costs

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The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.

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Economic Development

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A multidimensional concept involving improvement in standards of living, reduction in poverty, improved health and education along with increased freedom and economic choice.

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Economic Growth

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An increase in the actual level of output of goods and services produced by an economy, i.e. an increase in real GDP over time.

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Economic Profit (Abnormal or Supernormal profit)

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Economic profit (abnormal or supernormal profit) is earned when a firm’s revenues are greater than its total opportunity costs (its economic costs).

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Economies of Scale

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A fall in average costs in the long run, as a result of improved communication, efficient management, bulk buying, specialisation and more efficient transport and packaging.

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Excess Demand

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Occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.

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Excess Supply

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Occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.

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Factors of Production

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The land, labour, capital and management (entrepreneurship) that are used in production.

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Fixed Costs

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Costs that do not vary with the level of output. They are fixed costs that cannot be changed in the short-run i.e capital, utilities etc.

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GDP

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The total money value of all final goods and services produced in an economy in a given time period, usually a year.

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GNI/GNP

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The total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit).

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Green GDP

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A measure of the total output of an economy having taken into account the environmental consequences (externalities) involved in the production of that output.

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Homogeneous Products

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Completely identical products, as produced in perfect competition.

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Incentive function of Price

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Prices give producers the incentive either to increase or decrease the quantity they supply. A rising price gives producers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues.

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Incidence of Tax

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The amount of an indirect tax paid by consumers of a good or producers of a good.

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Income Elasticity of Demand (YED)

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A measure of the responsiveness of demand for a good to a change in consumers’ income. YED = %D in D/%D in Y

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Indirect Taxes

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Taxes placed upon the expenditure on a good or service, e.g. value added tax, or goods and services tax.

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Inferior Good

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A good whose demand falls as income rises. An inferior good has negative income elasticity. An example would be Denner Ice Tea compared to Nestea.

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Inflation

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A persistent increase in the average level of prices. Measured using the consumer price index i.e a measure of the change in price of a basket of goods bought by the average consumer.

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Inflationary Gap

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The gap that occurs when macroeconomic equilibrium occurs at a level that is above the full employment level of output.

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Infrastructure

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The large-scale capital usually provided by government that is necessary for economic activity to take place.

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Injections

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The investment, government spending and export revenues that add spending to the circular flow of income.

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Increasing Returns to Scale

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A given percentage increase in the quantity of all factors of production results in a greater percentage increase in output and thus a fall in long-run average costs (economies of scale).

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Interest Rate

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The price of credit or borrowed money.

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The International Monetary Fund (IMF)

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An organization working to foster global monetary cooperation, secure financial stability, facilitate international trade and reduce poverty.

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International (foreign) Reserves

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Foreign currencies held by governments (central banks) as a result of international trade. Reserves may be held so that the government may maintain a desired exchange rate for the country’s currencies.

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Investment

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Spending by firms on capital goods; the addition of capital stock to an economy.

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Joint Supply

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Goods which are produced together, or where the production of one good involves the production of another product, e.g. meat and leather (a by-product).

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Keynesian AS Model

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Keynesian view of aggregate suppy in the economy. In this model, with three distinct phases of aggregate supply, macroeconomic equilibrium may occur at a level of output that is less than full employment, and suggests that the economy may remain at this level of output in the absence of active intervention on the demand side by the government.

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Labour

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The work done by humans that is used in the production of goods and services.

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Lanf

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All raw materials that are used in the prodcuction of goods and services

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Law of Demand

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As the price of a product increases, the quantity demanded decreases, ceteris paribus.

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Law of Diminishing Marginal Returns

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In the short run, as increasing units of a variable factor are added to a fixed factor, the addition to total output (MP) will eventually fall.

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Law of Supply

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As the price of a product increases, the quantity supplied increases, ceteris paribus.

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Leakages

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The savings, taxes and import spending that remove spending from the circular flow of income.

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Linear Demand Function

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An equation in the form Qd = a – bP which shows the relationship between the price and the quantity of a product demanded.

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Linear Supply Function

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An equation in the form Qs . c 1 dP which shows the relationship between the price and the quantity of a product supplied.

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Long Run

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In terms of the theory of the firm, the period of time in which all factors are variable.

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Long-run Average Cost Curve

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A graphical representation of long -run average costs. The LRAC is u-shaped due to economies and diseconomies of scale.

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Macroeconomics

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The study of how the economy as a whole works.

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Management or Entrepeneurship

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The factor of production that brings together the other three factors of production with the aim of making profit. Entrepreneurship tends to involve risk taking.

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Manufactured Goods

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Goods that have been processed by workers.

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Marginal Private Benefit

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The extra benefit or utility to the consumer of consuming an additional unit of output.

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Marginal Private Cost

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The extra (private) cost to the producer of producing an additional unit of output.

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Marginal Social Benefit

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The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

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Marginal Social Cost

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The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

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Market

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A place where buyers and sellers of a product come together to make an exchange, or a trade. A market does not need to be a physical place, e.g. a stock market or foreign exchange market, where the product is traded via computers.

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Market Equilibrium

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The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply.

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Market Failure

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Occurs when the production of a good does not take place at the socially efficient level of output (allocative efficiency where MSC = MSB).

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Micro-credit

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Loans of small amounts that given to people who use the loans to start up small-scale businesses. People who obtain micro-credit would have difficulty getting loans from the formal banking sector due to a lack of income and collateral.

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Microeconomics

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The study of the behaviour (supply and demand) of individual markets.

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Millenium Development Goals

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Eight goals adopted by international leaders in 2000, to be achieved by 2015, including goals and targets on income poverty, hunger, maternal and child mortality, disease, inadequate shelter, gender inequality, environmental degradation and the Global Partnership for Development.

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Monetary Policy

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The set of official policies concerning an economy’s official interest rate and money supply. Monetary policy may be used to manage the level of aggregate demand (AD) and may be expansionary (to raise AD) or contractionary (to lower AD).

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Monopolistic Competition

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A market structure charaterized by a large number of small firms, producing differentiated products, with no barriers to entry or exit.

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Monopoly

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A market structure where there is only one firm, or a dominant firm, in the industry. There are high barriers to entry.

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Multiplier

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The amount by which an injection is multiplied in order to calculate the final addition to national income as a result of the injection.

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Natural Monopoly

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A situation where there are only enough economies of scale available in a market to support one firm, such that it is natural that the industry be dominated by one firm only.

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Negative Externality of Consumption

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The external costs to a third party that occur when a product is consumed. For example cigarettes.

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Negative Externality of Production

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The external costs to third party that occur when a product is produced. For example high polluting industries - third party would be health and environment.

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Non-collusive Oligopoly

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Where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.

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Non-Government Organisations (NGO's)

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Organizations that are not associated with a government that exist to promote economic development and/or humanitarian ideals and/or sustainable development.

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Normal Good

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A good whose demand rises as income rises. A normal good has positive income elasticity.

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Oligopoly

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A market structure characterized by a small number of large firms dominating the industry due to high barriers to entry. There are many different theories of oligopoly.

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Perfect Competition

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A market structure characterized by a large number of firms, producing homogeneous products, each of which is too small to influence the market. The firms are price takers because of this. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

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Positive Externalities of Consumption

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The external benefits to a third party that occur when a product is consumed.

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Positive Externalities of Production

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The external benefits to a third party that occur when a product is produced.

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Price Ceiling (max. price)

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A maximum price set by the government or other authority above which the product may not be sold in order to support the consumers of the product. Examples of maximum prices include those set on essential food products or rent.

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Price Discrimination

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The act of charging different consumers of an identical product different prices, e.g. based on time of purchase, age of consumer, quantity of purchase or time of consumption.

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Price Elasticity of Demand (PED)

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A measure of the responsiveness of the quantity of a gooddemanded to a change in its price.

PED = %D in Qd/%D in price. PED = P1DQ/Q1DP

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Price Elasticity of Supply (PES)

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A measure of the responsiveness of the quantity of a good supplied to a change in its price. PES = %D in Qs/%D in price. PES = P1DQ/Q1DP

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Price Floor (min. price)

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A minimum price set by the government or other authority below which the product may not be sold in order to support the producers of a product.

Examples of minimum prices include those set on agricultutral products and wages in a labour market.

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Price Taker

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In perfect competition, each firm is a price taker, taking the equilibrium price set in the market.

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Primary Commodities

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Raw materials.

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Privatization

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A type of supply-side policy where the government sells public assets to the private sector.

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Producer Surplus

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

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Product Differentiation

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A strategy employed by producers where they attempt to make their products different from those of their competitors, e.g. differences in quality, performance, design, styling or packaging. It is a form of non-price competition.

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Profit Maximizing Output

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Often assumed to be the primary goal of firms. This is where the difference between total revenue and total cost is at the maximum or where marginal cost is equal to marginal revenue (MC = MR).

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Public Good

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A product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy.

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Quota

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Import barriers that set limits on the quantity or value of imports that may be imported into a country.

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Resource Allocation

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A primary focus of the study of economics is to examine the way that scarce factors of production (land, labour and capital) are used (allocated) to meet unlimited demand.

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Revenue Maximization

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An alternative goal of firms (as opposed to profit maximization). This occurs when marginal revenue is equal to zero (MR = 0).

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Revenue

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The income received by a firm from selling its product.

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Satisficing

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An alternative goal of firms (as opposed to profit maximization) . This occurs when enterpreneurs endeavour to cover their opportunity costs, but do not push themselves significantly further, even though they might be able to earn higher profits. It is essentially a mix of the words ‘satisfy’ and ‘suffice’.

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Seasonal Unemployment

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Unemployment that exists when people are out of work because their usual job is out of season, e.g. a ski instructor in the summer.

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Short Run

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In terms of the theory of the firm, the period of time in which at least one factor of production (usually capital) is fixed.

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Short-run Average Costs (SRAC)

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A graphical representation of short-run average costs. The SRAC is u-shaped due to the law of diminishing marginal returns.

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Shutdown Price

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Below the price where average
revenue is equal to average variable cost.
Below this price, the firm will shut down in
the short run.

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Specific Taxes

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An indirect tax where a fixed amount is added to the price of a good or service.

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Subsidy

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The amount of money given to producers of a product by the government. A subsidy increases the supply of the good by effectively lowering the firms’ costs of production.

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Substitute Goods

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Goods which can be used in place of each other, e.g. Adidas running shoes and Nike running shoes. Substitute goods have positive cross-price elasticity.

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Supply Curve

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A curve or line showing the positive relationship between the price of a product and the quantity supplied over a range of prices.

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Supply

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The amount of a good or service that producers are willing and able to supply at a given price in a given time period.

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Supply Side Policies

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Policies designed to shift the long-run aggregate supply (LRAS) curve to the right, thus increasing potential output in the economy.

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Sustainability

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In economic terms, sustainability is linked to the concept of sustainable development, which is development that meets the needs of present generations without compromising the ability of future generations to meet their needs. Sustainability implies an ability to sustain the world’s resources over time.

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Tariff

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A duty (tax) that is placed upon imports to protect domestic industries from foreign competition.

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Tax Allowances or Tax Credits

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A type of supply-side policy where the government allows households or firms to reduce the amount of direct tax paid to the government.

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Total, average and marginal cost

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Total costs include the complete cost of producing a level of output. Average costs are costs per unit of output (AC = TP/Q). Marginal cost is the addition to total cost of producing one extra unit of output (MC = DTC/DQ)

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Total, average and marginal product

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Total product is the total output of a firm at a given level of input. Average product is the output that is produced, on average, by each unit of the variable factor. (AP = TP/V). Marginal product is the extra output that is produced by using an extra unit of a variable factor. (MP = DTP/DV)

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Total, average and marginal revenue

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Total revenue is the price of a product multiplied by the quantity sold (TR = PxQ). Average revenue is the revenue that a firm receives per unit sold (AR = TR/Q). Marginal revenue is the extra revenue that a firm gains when it sells one more unit of a product (MR = DTR/DQ).

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Underemployment

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Exists when workers are carrying out jobs for which they are over-qualified or when workers are employed part-time, even though they are available for full-time employment.

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Unemployed

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The state of being without work, but willing and able to work, and actively looking for a job.

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Variable Costs

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Costs that vary directly with the level of output.

For example labour and raw materials.

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Weighted Price Index

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An approach to calculating the change in the price level by giving a weight to each item according to its importance in consumers’ budgets.

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Zero Economic Profit (normal profit)

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Normal profit is earned when revenue is equal to the total opportunity costs to the firm. A firm earning normal profit (or zero economic profit) has no incentive to leave the industry.