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IB Economics: Microeconomics
Economic terms in IB Book
50
Economics
11th Grade
11/18/2011

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Term
Substitution Effect
Definition
When the price of a product falls, then the product will be relatively more attractive to people than other products whose prices have stayed unchanged. It is likely that consumers will purchase more of the product, substituting it for products that were previously purchased.
Term
Services
Definition
non-physical activities people want
Term
Goods
Definition

Physical objects that people need and want.

Example: clothes, means of transportation, food

Term
Scarcity
Definition

Condition in which avaliable resources are limited.

Example: there is a limited number of food in the world.

Term
Social Science
Definition
The study of a society and the way individuals interact within it.
Term
Economics
Definition
The study of choices leading to the best possible use of the scarce resources in order to satisfy unlimited human needs and wants.
Term
Utility
Definition
Benefit or satisfaction humans take from consuming a good or service. It goes down with each good or service consumed. Example: A person will have less satisfaction for each individual hamburger after having eaten 5 hamburgers.
Term
Opportunity Cost
Definition
Value of the next best alternative that must be sacrificed to get something else. Therefore, it is what you give up in order to gain something. It can be money, time or resources.
Term
Free Good
Definition
Any good that is scarce, therefore has zero opportunity cost. Nothing must be given up in order to achieve this. Examples: salt water and air.
Term
Economic Good
Definition

Scarce; natural resources or resources made of natural resources. 

The opportunity cost is greater than zero because they cost money due to the fact that they are scarce.

Term
Factors of Production
Definition

All resources or imputs used to produce a good or service.  Consists of:

LAND: natural resources used and land;

LABOR: human resources determined by population, age, skill and training;

CAPITAL: man-made factors of production used to produce goods or services;

ENTERPRENEURSHIP/ MANAGEMENT: undertake the risk of organizing and combining factors for production.

Term
Rent, Wage, Interest, Profit
Definition
Payment that owners of factors of production receive for providing their resources to the production process
Term
Wage
Definition
Payment to those who provide LABOR (including bonuses)
Term
Rent
Definition
Payment to owners of LAND resources who supply their LAND to the production process.
Term
Interest
Definition
Payment to owner of CAPITAL resources
Term
Profit
Definition
Payment to owners of ENTERPRENEURSHIP.
Term
Households
Definition
The consumers of a good or service.
Term
Firms
Definition
The businesses behind the production of goods and services.
Term
Income
Definition
Households selling their factors of production to firms recieving payment. The amount of money they gain by working (wages), renting their house (rent), etc.
Term
Household expenditure
Definition
Payment households make to buy goods or services.
Term
Cost
Definition
Payment firms make to buy the factors of production. (Land, Labor, Capital, Enterpreneurship)
Term
Revenue
Definition
Payment firms make to buy the factors of production.
Term
Ceteris Paribus
Definition
Latin for "All other things equal", used when there is no external influence on something.
Term
Positive Statements
Definition
Describe something.They may be:
True or false;
Statement in theory. Example: Increase in price leads to decrease in quantity purchased;
Cause-and-effect relationship. Example: if government increases spending, unemployment will fall.
Term
Normative statements
Definition
They say "what ought to be". They are subjective statements of what should happen. Example: unemployment rate should be lower. They cannot be true or false.
Term
Output
Definition
Goods and services produced by economies for consumers.
Term
Economic Growth
Definition
When the quantity of output produced by an economy increases.
Term

Economic Contraction

or 

Negative Economic Growth

Definition
When the quantity of output produced by an economy over a period of time decreases.
Term
Economic Development
Definition
When the standard of living and well-being of people grows; increase in income and reduction in poverty.
Term
Sustainable Development
Definition
Development which meets the needs of the present without compromising the ability of future generations to meet their own needs.
Term

Production Possibilities Curve (PPC)

or 

Production Possibilities Fronteir (PPF)

Definition

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Shows the production abilities based on avaliable resources. To produce the greatest output all the resources must be employed (all used) and all must be employed in an efficient manner (all used in the best possible way). 

Term
Production Possibility Curve in relation to Scarcity, Choice and Opportunity Cost
Definition

Condition of scarcity...

  • does not allow the economy to produce outside the PPC.
  • forces the economy to make a choice about what particular combination of goods it wishes to produce.
  • means choices involve opportunity costs.
Term
Shapes of the PPC
Definition
  1. It tends to bend to the right; hence opportunity varies from point to point.
  2. It is straight when the opportunity cost is constant and does not change.
Term
Shifts in the PPC
Definition
  1. Shifts outwards to the right mean production has an INCREASE due to
    1. Increase of factors of production
    2. Improvement in resource quality (such as more educated labor)
    3. New and improved technology being used to produce goods.
  2. Shifts inwards to the left mean production has a DECRESE due to:
    1. Decrease in the factors of production
    2. Diminishing resource quality 
    3. Use of less productive technology
  3. Shifts are not always parallel or equal in both factors. Sometimes only one of the factors of the PPC will change.
Term
Consumer goods
Definition
Goods purchased by consumers that satisfy immediate needs and wants.
Term
Consumer goods
Definition
Goods purchased by consumers that satisfy immediate needs and wants.
Term
Questions generated by scarcity
Definition
  1. What should be produced? (resource allocation)
  2. How to use the resources? How to produce?
  3. For whom to produce? (distribution of income)
Term
Resource Allocation
Definition
Assigning avaliable resources or factors of production to specific uses
Term
Reallocation of resources
Definition
When the economy reassigns resources to form a different combination of two goods.
Term
Overallocation
Definition
Too much of a resource assigned to what is socially desirable.
Term
Underallocation
Definition
Too few resources assigned to what is socially desirable.
Term

Distribution of Income

or 

Distribution of Output

Definition

How much income different individuals in the population will recieve;

or

How much output will different individuals in the population recieve.

Term
Redistribution
Definition
When distribution of income for certain individuals or groups either increase or decrease.
Term
Types of Economies
Definition

MARKET:

Private ownership of resources, private decision-making, relying on prices determined in the free market.

COMMAND:

Government (public) ownership of resources and decision-making, relies on commands and non-price rationing techniques.

MIXED:

Mix of public and private resource ownership and decision-making; and price and non-price rationing

Term
Resource Ownership
Definition

PUBLIC SECTOR: parts of the economy under ownership of the government

PRIVATE SECTOR: parts of the economy under private ownership

Term
Economic Decision-Making
Definition
Can be made by either the public or private sector.
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