question

Scarcity

answer

the basic economic problem - something is scarce when it is both limited in supply and desire

question

Market

answer

a place where buyers and sellers come together to engage in exchange with one another

question

Market economy

answer

an economy where resource allocation is determined mainly by market forces of demand and supply

question

Competitive Market

answer

the market for a good with a large amount of buyers and sellers, where the single seller has very little or no market power

question

Opportunity cost

answer

the cost of an economic decision in terms of the value of the next best alternative that was sacrificed

question

Resource allocation

answer

the allocation of resources is concerned with how resources (land, labour, capital and management) are distributed in an economy

question

Ceteris paribus

answer

other things equal; assuming other variables are constant (Latin phrase)

question

Economic growth

answer

an increase in the output of goods and services in a nation over time (outward shift of a nation's PPC) and is measure by an increase in real GDP.

question

Productivity

answer

the output attributable to each unit of output

question

Demand

answer

the quantity of a good or service that consumers are willing and able to buy at a given price during a specific time period

question

Law of demand

answer

as the price of a good increases, the quantity demanded of a good decreases. (and vice versa =) as the price of a good decreases, the quantity demanded of a good increases.

question

Determinants of demand

answer

the non-price variables that influence the demand for a good or service

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Free good

answer

a good that is abundant; is obtained without opportunity cost.

question

Economic good

answer

a good that is scarce; has an opportunity cost

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Positive statement

answer

a statement which can be testable as right or wrong; when you claim a 'fact' to be true

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Normative statement

answer

a statement which is subjective or political; a matter of opinion

question

Mixed economy

answer

an economy in which resource allocation is carried out partly by the state and partly by market forces

question

Factors of Production

answer

Land and Capital (non-human factors), Labour and Entrepreneurship (human factors)

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Human resources

answer

the labour force of a country or the human capital of a country

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Entrepeneurship

answer

the factor of production involving organising of the other factors and/or risk taking.

question

Capital good

answer

a good that is used to produce something else

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Consumer good

answer

a good that is used for social/private entertainment/use

question

Competitive market

answer

the market for a good with a large number of buyers and sellers (where a single seller has very little market power)

question

Marginal benefit

answer

the additional utility or satisfaction derived by an increase or a decrease in the amount of an item consumed or an activity enjoyed

question

Normal good

answer

a good where demand increases as consumer income increases (and decreases when consumer income decreases)

question

Inferior good

answer

a good where demand decreases as consumer income increases (and increases when consumer income decreases)

question

Substitute good

answer

a good for which demand will increase when the price of the other good increases (and vice versa)

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Complementary good

answer

a good for which demand will increase when the price of the other decreases (and vice versa) - goods consumed together

question

Giffen good

answer

a rare type of good whose demand rises when price rises, due to the income effect of a rise in the price causes you to buy more of this cheap good because you can't afford more expensive goods

question

Supply

answer

the quantity of a good or service that producers are willing and able to supply at a certain price and during a certain time period.

question

Law of supply

answer

as price increases, more of a good is offered for sale by firms (and vices versa)

question

Determinants of supply

answer

the non-price factors that influence the supply of a good or service

question

Supply substitue

answer

a good or service which can be produced is a similar way, with similar inputs and processes as another good (ex: supply substitutes are the product of joint supply)

question

Supply shock

answer

a random event that disrupt the normal supply of goods and services (can be positive, but mainly negative)

question

Market equilibrium

answer

occurs at a price where quantity demanded and quantity supplied are equal (market-clearing price)

question

Consumer surplus

answer

the benefit consumers receive when they pay a price below what they are willing and able to pay

question

Producer surplus

answer

the benefit producers receive when the sell a good for a price that is above what they are willing and able to sell it at

question

Community surplus

answer

the surplus achieved by combining the consumer and producer surplus

question

Allocative efficiency (socially optimal)

answer

when marginal benefits (MB) equal marginal costs (MC)

question

Price elastic

answer

is when the change in price of a product leads to a proportionately greater change in the quantity demanded (PED is greater than 1)

question

Price inelastic

answer

is when the change in price of a product leads to a proportionately smaller change in the quantity demanded (PED is less than 1)

question

Price elasticity of demand (PED)

answer

a measure of the responsiveness of the consumers to a change in price of a good or service

question

Price elasticity of supply (PES)

answer

a measure of the responsiveness of the producer to a change in price of a good or service

question

Cross-price elasticity of demand (XED)

answer

a measure of the responsiveness of the consumers of one good to a change in the price of another good.

question

Income elasticity of demand (YED)

answer

a measure of the responsiveness of the consumers of a good to a change in their income

question

Excess capacity

answer

the amount of output a firm is able to produce in the short run beyond its current level without having to expand their factors of production

question

Tax

answer

a tax is a charge placed on an individual firm that is payable to the government under punishment of law

question

Indirect taxes (sales taxes)

answer

taxes placed on goods and services by governments (consumption/expenditure taxes)

question

Excise taxes

answer

taxes placed on one type of good

question

Direct Tax

answer

a tax on income/wealth/firm's profit

question

Progressive Tax

answer

a tax which increases proportionally with income

question

direct taxes

answer

taxes placed on income and collected by the government directly from the individual or household

question

Specific tax / flat rate tax / per-unit tax

answer

a set amount charged per unit of the product sold

question

Ad valorem tax / value added tax (VAT)

answer

a percentage tax on one or more goods

question

Tax Incidence

answer

a measure of the consequences of a tax on all the affected parties

question

Deadweight loss

answer

the loss of welfare, utility or benefit to market participants (typically as a result of taxes, policies or externalities)

question

Subsidy

answer

a payment from the government to an individual or firm for the purpose of increasing the purchase or supply of a good

question

Price ceiling

answer

a maximum legally allowable price for a good or service, set by the government

question

Price floor

answer

a minimum legally allowable price for a good or service, set by the government

question

Minimum wage

answer

a form of price floor which is a legal minimum price for labour, set by the government

question

Informal (black/underground/parallel) market

answer

a market in which economic activity is not officially measured/recorded

question

Market failure

answer

any situation where the allocation of resources is inefficient; where the optimal output for a good does not match that of the private market

question

Pigouvian tax

answer

a corrective tax

question

Externality / spillover

answer

a transaction where someone other than the buyer or seller (a third party), experiences a benefit or loss as a result of their transaction

question

Marginal Social Benefit (MSB)

answer

the utility or benefit derived from the use of a good, including benefits to the consumer and the rest of society

question

Marginal Private Benefit (MPB)

answer

the utility or benefit derived exclusively by the consumer of a good

question

Marginal Social Cost (MSC)

answer

the cost incurred from the production or use of a good, including costs to the producer and costs to the rest of society

question

Marginal Private Cost (MPC)

answer

the cost suffered solely by the producer of a good

question

Negative externality

answer

the situation in which MSC is greater than MSB and therefore causes costs to a third party through the production or consumption of a good or service

question

Positive externality

answer

the situation in which MSB is greater than MSC and therefore causes positive spillover effects on a third party through the production or consumption of a good or service

question

Asymmetric Information

answer

when one side of a market knows more than the other side does

question

Merit good

answer

a good or service for which marginal social benefits (MSB) exceed marginal social costs (MSC) when sold on the open market - they are considered to be beneficial for people (society) and are therefore under-provided and under-consumed by the free market

question

Demerit good

answer

a good for which marginal social costs (MSC) exceed marginal social benefits (MSB) when sold on the open market - they are considered to create negative spillover costs to third parties (society) and are therefore over-provided and overer-consumed by the free market

question

Public good

answer

a good which is non-rivalrous and non-excludable (typically provided by the government) - extreme examples of merit goods

question

Difference between public and merit/demerit goods

answer

a public good, unlike a demerit or merit good, is a good which, when left to the free market, would not be produced as producer cannot gain profit from them

question

Tragedy of the Commons

answer

a dilemma posed when common resources are use or degraded rapidly by private individuals who enjoy the short-term benefits of the resource, but are ignorant or neglectful to its long-term depletion

question

Carbon taxes

answer

taxes charge levied by the government on firms burning fossil fuels in their production process

question

Tradeable permits / cap-and-trade

answer

a system for taxing pollution levels where pollution licenses are exchangeable between firms on a secondary basis - they are meant to internalize the external costs of burning fossil fuels

question

Factor immobility

answer

a market failure in which factors of production are immobile and cannot be increased

question

Inequality

answer

a market failure in which unfair distribution of resources occurs in the free market

question

Real income

answer

income that is adjusted for prices changes, and implies the actual buying power of a consumer

question

Buying Power

answer

the amount of goods or services that can be purchased (with a unit of currency)

question

Utility

answer

a representation of preferences over some set of goods and services (and the satisfaction received)

question

Diminishing Marginal Utility

answer

as we consume additional units of something, the satisfaction (utility) we derive for each additional until (marginal unit) grows smaller (diminishes)

question

Total Revenue (+equation)

answer

the income earned from a firm's sale of its good or service P * Qd (Price x Quantity demanded)

question

Profit

answer

Revenue - Cost

question

Market/Immediate Time Period

answer

fixed quantity supplied (perfectly or highly inelastic)

question

Short Run (micro)

answer

the time period in which at least one of the factors of production is fixed (slightly inelastic or unit elastic)

question

Long Run (micro)

answer

the time period in which none of the factors of production are fixed

question

Inventories

answer

the amount of a good held in stock by a firm

question

Free rider problem

answer

people who don't pay for a good or service but enjoy the benefits of it

question

Normal Profit

answer

the revenue needed to keep a firm in an industry (in order to cover all opportunity costs of production)

question

Perfect competition

answer

a market is perfectly competitive if there are a large number of firms producing identical products, facing identical production costs, and in which there are no barriers to entry

question

Allocative Efficiency

answer

the point at which marginal costs equal the price

question

Productive/technical Efficiency

answer

the point at which a firm produces at the lowest unit or average total cost (or where MC equals ATC)

question

Monopoly

answer

a market where one firm dominates the market for a good that has no substitutes and where there are high barriers to entry

question

Monopolistic Competition

answer

a market is monopolistically competitive if there are many firms producing differentiated products and in which there are no barriers to entry or exit

question

Oligopoly

answer

a market where a few sellers dominate the market for an homogeneous or differentiated good and where there are high barriers to entry in the market

question

Cartel

answer

an agreement between firms to fix prices (or output)

question

Macroeconomics

answer

The study of economy-wide aggregate (total) behaviors.

question

Macroeconomic objectives

answer

1) Low unemployment or full employment (NRU) 2) Price level stability 3) Economic growth also... 4) Economics development 5) Income Inequality

question

Circular Flow of Income

answer

a model that describes how economic activity occurs between the different groups in an economy. Saving, taxation and spending on imports represent 'leakages' from the circular flow. Investment, government spending and export revenue represent 'injections' into the circular flow.

question

Aggregate Demand

answer

total demand for goods and services in an economy (C+I+G+Xn)

question

Components of Consumption (5)

answer

Level of national income (consumption, savings, taxes, imports) Wealth Real interest rates Household dept Consumer Confidence and expectations of future income

question

Sticky wages

answer

wages that can not be reduced when the AD of labour decreases (like a price floor on wages)

question

Components of Investment (2)

answer

Interest rates Business Confidence and expectations (future prices, technology, business taxes, inventories, the degree of excess capacity)

question

Components of Net Exports (3)

answer

Incomes abroad Taste and preferences of consumers Exchange rates

question

Aggregate Supply

answer

total supply of goods and services in an economy.

question

Short run aggregate supply curve

answer

a macroeconomic curve that shows the relationship between the price level and the quantity of real output (real GDP) when resource prices (especially wages) do not change

question

Consumption

answer

household spending on goods and services (both durable and non-durable goods)

question

Investment

answer

business spending on capital goods

question

Saving

answer

income that is not spent, setting aside income or money for future use

question

Imports

answer

goods and services that foreign countries buy from the domestic country

question

Exports

answer

goods and services that are produced domestically and sold to foreign countries

question

Marginal propensity to... (MPC, MPS, MPT, MPM)

answer

they measure the proportion of a change in household income that is ... (used to consume domestic output, saved by households, paid in taxes and used to purchase imports)

question

Gross Domestic Product

answer

the total market value of all final goods and services produced within an economy over a period of time (usually a year) (and in dollars)

question

Real GDP (or real output)

answer

the total value of all goods and services produced in a country of a country's national income over a given time period (adjusted for inflation and measure in dollars)

question

Expenditure approach

answer

a method used to calculate GDP by summing total expenditures on final goods and services OR it is a method of calculating GDP based on summing consumption, investment, government expenditure and net exports (ie C + I + G + X - M).

question

Income approach

answer

a method used to calculate GDP by summing up all incomes received by factors of production

question

Output approach

answer

adds up all production values of final output from firms

question

Gross National Product / Income

answer

the market value of all goods and services produced by domestically-owned factors of production over a specific time period, usually one year (it attempts to measure the flow of income based on actual ownership of the factors of production)

question

Real vs Nominal GDP

answer

real GDP is GDP adjusted for inflation and nominal GDP is measured in current dollars

question

Green GDP

answer

a measure of the total output of an economy, taking into account the environmental consequences (externalities) involved in the production of that output

question

Final vs. Intermediate goods

answer

intermediate are goods which are produced by a firm and used in the production process whereas final goods are the ones used for final consumption

question

Double counting

answer

including the same good or service more than once in your valuation of output

question

Investment

answer

business spending on capital goods

question

Capital Formation

answer

additions to the stock of capital over a period of time

question

Capital stock

answer

a nation's capital stock is the value of all capital goods in the country (at a point in time)

question

Purchasing Power Parity (PPP)

answer

the theory that in the long run identical goods and services sold in different countries will cost the same (for GDP measures it looks at the buying power in a country: the amount a person can buy with their income at local prices)

question

Interest Rate

answer

the price of money (borrowing or loaning), expressed as a percentage (often called the opportunity cost of spending money)

question

National Income

answer

the total value of all income in a nation (Consumption + Government Spending + Investment + (Exports - Imports))

question

Fiscal Policy

answer

a policy that uses changes in government spending (G) and/or taxation (T) to affect aggregate demand

question

Monetary Policy

answer

a demand-side policy, where the central bank uses changes in the money supply or interest rates to affect AD

question

Expansionary Fiscal Policy

answer

an increase in government spending or a reduction in taxes

question

Keynesian Economics

answer

economic theory based on the principles of John Maynard Keynes stating that government spending should increase during business slumps and be curbed during booms.

question

Neo-Classical Economics

answer

an approach to economics based on supply and demand which depends on economic agents operating rationally based on available info

question

Business Cycle

answer

economy-wide fluctuations in production or economic activity over a period of months or years, consisting of recession and recovery and growth and decline

question

Recession

answer

state of economy declining - a decrease in real GDP over two consecutive quarters

question

Recovery

answer

state of economy rising - an increase in real GDP, usually accompanied by a rise in employment

question

Expansion

answer

when real GDP expands beyond recovery

question

Depression

answer

a severe reduction in an economy's total output, accompanied by high unemployment lasting several years

question

Unemployment

answer

people who are actively looking for a job

question

Unemployment rate

answer

the number of workers without a job, who are willing and able to work, expressed as a percentage of the workforce

question

Labor force

answer

all non-institutionalized civilian individuals age 16 or above, who are either working or actively looking for work

question

Real wages

answer

wages are the payment for labour/working and that real wages are the value after they have been adjusted for inflation (thus real wages refers to the "purchasing power" of wages)

question

Autonomous consumption

answer

the level of consumption which does not depend on income (the argument is that even with zero income you still need to buy enough food to eat, through borrowing or running down savings)

question

Frictional Unemployment

answer

Unemployment between jobs.

question

Seasonal Unemployment

answer

Unemployment due to seasonal circumstances.

question

Structural Unemployment

answer

unemployment that exists as a result of rigidities in the labour market (such as a fall in the demand for a particular type of labour)

question

Cyclical/Disequilibrium/Demand deficient Unemployment

answer

unemployment caused by variations in the business cycle (recession - decrease in GDP)

question

Voluntary unemployment

answer

people who are unwilling to work at the market wage rate

question

Natural Rate of Unemployment (NRU)

answer

Frictional + Structural + Seasonal unemployment (5-6% for industrialised countries) - it is the level of unemployment that prevails when a nation is producing at it's full-employment level of output

question

Discouraged workers

answer

workers who have dropped out of the labor force because of lack of success in finding a job (not included in unemployment rate)

question

Underemployment

answer

working below productive capacity (part time instead of full time)

question

Disguised unemployment

answer

workers who have a job but are redundant or non-productive

question

Full employment

answer

the level of employment where there is no cyclical unemployment (100% employment - NRU = 94-95% for industrialised countries)

question

Crowding Out

answer

a decrease in AD/consumption/investment that results from government's increased borrowing (which drives up interest rates)

question

Multiplier

answer

the amount by which an injection is multiplied to result in a change in GDP that is higher than the injection

question

Philip's Curve

answer

curve showing a short-run trade-off between unemployment and inflation; only applies if there is a change in AD; in the long run, leads to an increase in inflation

question

Wealth

answer

the total value of the accumulated assets owned, minus its liabilities. The wealthier a nation's households, the greater the level of consumption

question

Loanable funds market

answer

a hypothetical market that shows the relationship between the real interest rate in a country and the supply and demand for money from households and firms for private investment

question

Depreciation

answer

a decrease in the value (price) of a currency (in terms of a foreign currency or in a floating exchange rate system)

question

Budget surplus

answer

when government (tax and other) income (T) exceeds government expenditures (G)

question

Budget deficit

answer

when government expenditures (G) exceed government (tax) revenues (T)

question

Business confidence

answer

the degree of optimism or pessimism characterizing he businesses which affects their decisions on investment spending.

question

Business cycle

answer

the fluctuations of real GDP in a given time period

question

Capital

answer

produced means of production (tools, equipment, machines, etc.)

question

Stimulus measures

answer

used when economy in a recession - increase in Government spending and decreasing direct Taxes such as: Expansionary Fiscal Policy

question

Austerity policies

answer

used when economy is concerned with annual budget deficit and dept - decrease Government spending and increase Taxes

question

Supply-side policies

answer

policies designed to increase the aggregate supply of an economy (shift the AS curve to the right)

question

Durable goods

answer

goods that will last longer than a year (cars, house, etc.)

question

Double-dip or Triple-dip Recession

answer

when it looks like an economy is recovering but only recovers for a short period and turns to a recession again

question

Inflationary Spiral (Keynesian)

answer

once the economy goes down it will keep going down

question

Dept

answer

accumulation of deficit (imbalance in money intake)

question

Indebtness

answer

the amount of money that a country owes to other countries and/or international institutions

question

Default

answer

when you cannot pay back bonds

question

Inventories

answer

Inventories are goods that have been produced but have not been sold

question

CPI

answer

Consumer Price Index measures the prices of goods and services in a particular nation over time, and is widely used by governments to measure changes in the price level of products typically bought by households

question

Inflation

answer

Persistent increase in the average price level of goods and services in a nation, measured by consumer price index.

question

Deflation

answer

a sustained decrease in the average price level of a nation's output

question

Disinflation

answer

a decrease (or reduction) in the rate of inflation (at which avg. price level is rising)

question

Inflation rate

answer

the percentage change in a price index between one period of time and another. It measures the change in the average price level of goods and services in nations over time.

question

Demand-pull inflation

answer

an increase in price levels for goods and services due to the increased overall demand for a nation's output (when consumption, investment, government spending and net exports rise without corresponding to an increase in AS)

question

Cost-push inflation

answer

an increase in price levels for goods and services due to an increase in the cost of production (faced by producers) which shifts the SRAS curve to the left

question

Stagflation

answer

either zero or negative economic growth (cost-push inflation is often accompanied by stagflation)

question

Negative supply shock

answer

an unexpected decrease in AS of a nation

question

The inflationary spiral

answer

the situation in which demand-pull inflation leads to cost-push inflation (a major threat to the economy)

question

Hyperinflation

answer

a very high rate of inflation (basically when prices increase on a daily basis)

question

Price level (index)

answer

a measure of the average level of prices of goods and service in an economy

question

Monetarism

answer

the school of economic thought (promoted by Milton Friedman), which argues that a change in the supply of money only causes inflation or deflation - but not a change in the level of employment in a nation. (supports the view of LRPC at NRU, and LRAS of neo-classical views)

question

Profit push

answer

businesses are greedy and raise prices to gain profits

question

Wage push

answer

people want to raise their wages

question

Efficiency

answer

which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency

question

Equality

answer

smaller disparities among a nation's households in their maintainable living standards and in the distribution of income and wealth

question

Equity

answer

refers to the fairness in economics, and requires a level in which all individuals of a society have a fair shot at achieving economic success

question

Relative poverty

answer

the condition experience by people in a country whose incomes are considerably lower than the higher income group in the same country

question

Absolute poverty

answer

the condition experienced by people in a country whose incomes are too low to be able to afford even the most basic necessities for a healthy and safe existence

IB HL Economics – Paper 1 definitions: Micro and Macroeconomics – Flashcards

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