Definitions IB1 Flashcards
allocative efficiency
Occurs where the marginal
social cost of producing a good is equal to the
marginal social benefit of the good to society.
In different words, it occurs where the
marginal cost of producing a good (including
any external costs) is equal to the price that is
charged to consumers.
appropriate technology
Where technology caters
to the particular economic, social and
environmental characteristics of its users.
capital
The factor of production that is made by
humans and is used to produce goods and
services. It occurs as a result of investment.
central bank
The government’s bank. The institution that is responsible for an economy’s
monetary policy.
ceteris paribus
A latin expression meaning ‘let
all other things remain equal’ used by
economists to develop economic theories or
models.
circular flow of income model
A simplified
model of the economy that shows the flow of
money through the economy.
DRAW IT
common access resources
Also known as
common pool resources or common property
resources, these are resources which have
properties similar to public goods in that it is
very difficult or impossible to prevent people
from using or consuming the resource.
Therefore, they are vulnerable to overuse and/
or degradation.
consumer surplus
The additional benefit or utility
received by consumers by paying a price that is
lower than they are willing to pay.
consumption
Spending by households on
consumer goods and services.
cross price elasticity of demand
A measure of
the responsiveness of the quantity of one good
demanded in response to a change in the price
of a related good. XED = %D in Qd of Good
A/%D in price of Good
de-merit goods
Products that are considered to
be harmful for people that would be over-
provided or over-consumed in a purely free
market economy. De-merit goods are
generally considered to be products whose
consumption creates negative externalities.
deflation
A persistent fall in the average level of
prices.
demand
The quantity of a product that
consumers are willing and able to buy at a
given price in a given time period.
demand curve
A curve, or line showing the
relationship between the price of a product
and quantity demanded over a range of prices.
depreciation
A decrease in the value of a
country’s currency in a floating exchange rate
system.
direct taxation
Taxation imposed on people’s
income or wealth, and on firms’ profits.
economic costs
The total opportunity costs of
production to a firm, including the
opportunity cost of entrepreneurship.
economic development
A multidimensional
concept involving improvement in standards
of living, reduction in poverty, improved
health and education along with increased
freedom and economic choice.
economic growth
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.
excess demand
Occurs where the price of a good
is lower than the equilibrium price, such that
the quantity demanded is greater than the
quantity supplied.
excess supply
Occurs where the price of a good
is higher than the equilibrium price, such that
the quantity supplied is greater than the
quantity demanded.
factors of production
The land, labour, capital
and management (entrepreneurship) that are
used in production.
fiscal policy
The set of government polices
concerning its taxation and expenditure. Fiscal
policy may be used to manage the level of
aggregate demand (AD) and may be
expansionary (to raise AD) or contractionary
(to lower AD).
frictional unemployment
Unemployment that occurs when people are entering the workforce after leaving education, or people who have left one job and are searching for a new job.
full employment level of output
The level of output that is produced by the economy when there is only natural unemployment.
inferior good
A good whose demand falls as income rises. An inferior good has negative income elasticity
infrastructure
The large-scale capital usually provided by government that is necessary for economic activity to take place.
interest rate
The price of credit or borrowed money.
International Monetary Fund
n organization working to foster global monetary cooperation, secure financial stability, facilitate international trade and reduce poverty.
investment
Spending by firms on capital goods; the addition of capital stock to an economy.
Keynesian AS model
A model showing the interpretation of the 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.
labour
The work done by humans that is used in
the production of goods and services.
land
All raw materials that are used in the
production of goods and services
law of demand
As the price of a product
increases, the quantity demanded decreases,
ceteris paribus.
law of supply
As the price of a product increases,
the quantity supplied increases, ceteris paribus.
leakages
The savings, taxes and import spending
that remove spending from the circular flow
of income.
long run
In terms of the theory of the firm, the
period of time in which all factors are variable.
macroeconomics
The study of how the economy
as a whole works.
marginal private benefit
The extra benefit or
utility to the consumer of consuming an
additional unit of output.
marginal private cost
The extra (private) cost to
the producer of producing an additional unit
of output.
marginal social benefit
The extra benefit or
utility to society of consuming an additional
unit of output, including both the private
benefit and the external benefits.
marginal social cost
The extra cost to society of
producing an additional unit of output,
including both the private cost and the
external costs.
market
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.
market equilibrium
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.
market failure
Occurs when the production of a
good does not take place at the socially
efficient level of output (allocative efficiency
where MSC = MSB).
merit good
Products that are considered to be
beneficial for people that would be under-
provided or under-consumed in a purely free market economy. Merit goods are generally
considered to be products whose consumption
create positive externalities of consumption.
microeconomics
The study of the behaviour
(supply and demand) of individual markets.
monetary policy
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).
multiplier
The amount by which an injection is multiplied in order to calculate the final addition to national income as a result of the injection.
natural rate of unemployment
he rate of unemployment that is consistent with a stable rate of inflation. It is the rate of unemployment that exists when the economy is at the full employment level of output. It is the rate where the long run Phillips curve touches the x-axis.
negative externality of consumption
he external costs to a third party that occur when a product is consumed.
negative externality of production
The external costs to third party that occur when a product is produced.
net exports
Export revenues minus import expenditure.
normal good
A good whose demand rises as income rises. A normal good has positive income elasticity.
positive externality of consumption
The external benefits to a third party that occur when a product is consumed.
positive externality of production
The external benefits to a third party that occur when a product is produced.
price ceiling (maximum price)
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.
price elasticity of demand
A measure of the responsiveness of the quantity of a good demanded to a change in its price. PED = %Din Qd/%Din price. PED = P1DQ/Q1DP
price elasticity of supply A measure of the responsiveness of the quantity of a good supplied to a change in its price. PES = %Din Qs/%Din price. PES = P1DQ/Q1DP
price floor (minimum prices)
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.
primary commodities
Raw materials.
