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.
producer surplus
The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive
progressive taxation
A system of direct taxation where tax is levied at an increasing rate for successive bands of income. The marginal tax rate is higher than the average tax rate.
proportional taxation
A system of taxation in which tax is levied at a constant rate as income rises, for example 10% of each increment of income as income rises.
public good
A product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy.
regressive taxation
A system of taxation in which tax is levied at a decreasing average rate as income rises. This form of taxation takes a greater proportion of tax from the low income taxpayer than from the high-income taxpayer.
resource allocation
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.
revenue
The income received by a firm from selling its product.
seasonal unemployment
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.
short run
In terms of the theory of the firm, the period of time in which at least one factor of production (usually capital) is fixed.
specific taxes
An indirect tax where a fixed amount is added to the price of a good or service.
structural unemployment
Unemployment that exists when in the long term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour. There is a mismatch between skills and the jobs available.
subsidy
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.
substitute good
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.
supply curve
A curve or line showing the relationship between the price of a product and the quantity supplied over a range of prices.
supply
The amount of a good or service that producers are willing and able to supply at a given price in a given time period.
sustainability
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.
underemployment
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.
unemployment rate
The number of unemployed workers expressed as a percentage of the total workforce.
unemployment
The state of being without work, but willing and able to work, and actively looking for a job
absolute advantage
Where a country is able to
produce more output than other countries
using the same input of factors of production.
ad valorem taxes
An indirect tax where a given
percentage is added to the price of a good or
service.
administrative barriers (in the context of trade)
Any administrative requirement that might
prevent or reduce the amount of imports.
aggregate demand
Total spending in the
economy, made up of consumption,
investment, government spending and net
export spending.
aggregate supply
Total amount of domestic
goods and services supplied by businesses and
the government, including both consumer
goods and capital goods.
anti-dumping
Legislation to protect an economy
against the importing of a good at a price
below its unit cost of production.
appreciation
An increase in the value of a
country’s currency in a floating exchange
rate system.
automatic stabilizers
An increase in the value of a
country’s currency in a floating exchange
rate system.
balance of payments
An increase in the value of a
country’s currency in a floating exchange
rate system.
balanced budget
A situation that exists when
planned government spending is equal to
planned government expenditure.
barrier to trade
Anything which prevents
free trade between two countries, e.g.
tariffs, quotas.
barrier to trade
Anything which prevents
free trade between two countries, e.g.
tariffs, quotas.
barrier to entry
Obstacles that prevent a new
firm from entering a market, such as
economies of scale, product differentiation
and legal protection.
break-even price
The price where average
revenue is equal to average total cost. Below
this price, the firm will shut down in the long
run.
budget deficit
A situation that exists when
planned government spending exceeds
planned government revenue. A government
may ‘run a budget deficit’ in order to increase
aggregate demand (AD) in the economy.
budget surplus
A situation that exists when
planned government revenue exceeds
planned government spending .
business cycle
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.
classical AS model
A model showing that the
long-run aggregate supply curve is vertical at
the full employment level of output.
common market
A customs union with
common policies on product regulation, and
free movement of goods, services, capital
and labour.
comparative advantage
Where a country is able
to produce a good at a lower opportunity cost
of resources than another country.
complementary good
Goods used in combination with each other, e.g. digital cameras and memory cards.
constant returns to scale
A given percentage
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.
consumer price index
A measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the ‘average’ consumer.
core inflation
A measure of inflation that factors
out the changes in the prices of products that
tend to experience volatile price swings, e.g.
food and energy prices. This gives policy
makers a better indication of long-term
changes in the price level.
corporate social responsibility
An approach taken by firms where they attempt to produce responsibly or ethically towards the community and environment, demonstrating a positive impact on society.
cost push inflation
A persistent increase in the
average price level that comes about as a
result of increases in the costs of production
and a decrease in aggregate supply (AS).
credit
Borrowed money
crowding out
A situation where the government spends more (Gov. ex.) than it receives in revenue and needs to borrow money, forcing up interest rates and ‘crowding out’ private investment and private consumption
current account (BOP)
A measure of the international
flow of funds from trade in goods and services,
plus net investment income flows (profit,
interest and dividends) and net transfers of
money (foreign aid, grants and remittances).
current account deficit
Where revenue from the
exports of goods and services and income
flows is less than the expenditure on the
import of goods and services and income flows
in a given year.
current account surplus
Where the revenue from
the export of goods and services and income
flows is greater than the expenditure on the
import of goods and services and income flows
in a given year.
customs union
An agreement made between
countries, where the countries agree to work
towards free trade among themselves and
they also agree to adopt common external
barriers against any country attempting to
import into the customs union.
cyclical (demand-deficient) unemployment
Unemployment that exists
when there is insufficient aggregate demand
in the economy and wages do not fall to
compensate for this. This is usually associated
with a slowdown in economic growth or
negative growth.
debt cancellation
The act of eliminating the debt
owed by a developing country government in
order to allow it to achieve development
objectives.
decreasing returns to scale
A given percentage
increase in the quantity of all factors of
production results in a smaller percentage
increase in output and thus an increase in
long-run average costs (diseconomies of scale).
deflationary (recessionary) gap
The gap that
occurs when macroeconomic equilibrium
occurs at a level that is less than the full
employment level of output.
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.
demand-pull inflation
A persistent increase in
the average price level that comes about as a
result of increases in aggregate demand (AD).
demand schedule A chart or table showing the
quantity of a product demanded at each price.
A demand schedule, or a demand function, is
used to draw a demand curve.
demand-side policies
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.
depreciation
A decrease in the value of a
country’s currency in a floating exchange rate
system.
deregulation
A type of supply-side policy where
the government reduces the number or type
of regulations governing the behaviour
of firms.
devaluation
A decrease in the value of a
country’s currency in a fixed exchange
rate system.
development indicators
Statistics that may be
used to assess the level of development of an
economy. These may be single indicators, e.g.
infant mortality rate, or composite indicators,
e.g. Human Development Index)
diversification
A strategy to reduce reliance on
the export of a narrow range of exports by
re-allocating resources to a wider range
of industries.
dumping
The selling of a good in another
country at a price below its unit cost
of production.
economic profit
Economic profit (abnormal or
supernormal profit) is earned when a firm’s
revenues are greater than its total opportunity
costs (its economic costs).
exchange rate
The value of one currency
expressed in terms of another currency.
export promotion
Strategies to encourage
economic growth through increased
international trade and the promotion of
export industries.
factor endowment
factors of production that a country has available to produce goods and services
financial account (BOP)
A measure of the net change in foreign
ownership of domestic financial assets,
including foreign direct investment, portfolio
investment and changes in foreign reserves,
formerly called the capital account.
fixed costs
Costs that do not vary with the level of output
fixed exchange rate
An exchange rate regime
where the value of a currency is fixed, or
pegged, to the value of another currency, (or
to the average value of a selection of
currencies, or to the value of
floating exchange rate
An exchange rate regime
where the value of a currency is allowed to be
determined solely by the demand for, and
supply of, the currency on the foreign
exchange market.
foreign debt
The total debt owed by the
government of one country to foreign lenders.
foreign direct investment
Long-term
investment by a multinational company in
a foreign country.
free trade area
An agreement made between
countries, where the countries agree to work
towards free trade among themselves, but are
able to trade with countries outside the free
trade area in whatever way they wish.
GDP per capita
The total money value of all final
goods and services produced in an economy in
one year per head of the population.
GDP
The total money value of all final goods and
services produced in an economy in a given
time period, usually a year.
GDO per capita
The total money value of all final
goods and services produced in an economy in
one year per head of the population.
Gini coefficient
A coefficient (or index) that is
derived from the Lorenz curve and is a
numerical indicator of income equality. It is
calculated by dividing the distance between
the Lorenz curve and the line of absolute
equality by the total area under the line of
absolute equality (multiplied by 100 for the
index). The higher the figure, the more
unequal the income distribution.
GNI/ GNP
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).
government spending
Spending by governments
on goods and services.
incidence of tax
The amount of an indirect tax
paid by consumers of a good or producers of
a good.
income elasticity of demand
A measure of the
responsiveness of demand for a good to a
change in consumers’ income. YED = %D in
D/%D in Y
indirect taxes
Taxes placed upon the expenditure
on a good or service, e.g. value added tax, or
goods and services tax.
inferior good
A good whose demand falls as
income rises. An inferior good has negative
income elasticity.
inflation
A persistent increase in the average
level of prices.
inflationary gap
The gap that occurs when
macroeconomic equilibrium occurs at a
level that is above the full employment
level of output.
injections
The investment, government spending
and export revenues that add spending to the
circular flow of income.
international reserves
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.
labour union or trade union
An organization of
workers whose goals include the improvement
of working conditions and payments to
workers. Unions work on behalf of workers
through negotiations with management.
Lorenz curve
A curve showing what percentage
of the population earns what percentage of
the total income in the economy. It is
calculated in cumulative terms. The further
the curve is from the line of absolute equality
(45 degree line), the more unequal
