European Baccalaureate Economics key terms

The value of the next best alternative given up when a choice is made. In exam answers it explains why any decision, private or public, involves a trade-off and must be justified against the alternative use of the same resources.

The condition in which resources are limited while wants are unlimited, so choices must be made. It is the founding problem of economics and the reason allocation mechanisms, prices and rationing exist.

A curve showing the maximum combinations of two goods an economy can produce with given resources and technology. Points inside show inefficiency, points outside are unattainable, and its slope reflects marginal opportunity cost.

Positive statements describe what is and can be tested against evidence; normative statements express value judgements about what ought to be. Distinguishing them is a standard requirement when evaluating policy claims in essays.

The assumption that all other variables stay constant while one changes. It allows a single cause-effect link, such as price and quantity demanded, to be isolated and is a frequent source of criticism when applied to real economies.

A graph showing the quantity of a good buyers are willing and able to purchase at each price, other things equal. It normally slopes downward and shifts when income, tastes, prices of related goods or expectations change.

A graph showing the quantity producers are willing to offer at each price, other things equal. It normally slopes upward and shifts with input costs, technology, taxes, subsidies or the number of firms.

The price and quantity at which quantity demanded equals quantity supplied, so there is no tendency to change. Above it a surplus pushes price down; below it a shortage pushes price up.

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the value exceeds one and inelastic when below one; it determines how revenue responds to price changes.

The percentage change in quantity demanded divided by the percentage change in income. Positive values indicate normal goods, values above one indicate luxuries, and negative values indicate inferior goods.

A cost or benefit arising from production or consumption that falls on third parties not involved in the transaction. Negative externalities cause overproduction and positive ones underproduction relative to the social optimum.

A situation in which an unregulated market allocates resources inefficiently, so social welfare is not maximised. Causes include externalities, public goods, imperfect competition, information problems and factor immobility.

A good that is non-rival and non-excludable, such as national defence. Because users cannot be excluded, private firms cannot charge for it, so markets underprovide it and public funding is usually justified.

The incentive for individuals to benefit from a good without paying for it. It arises with non-excludable goods and explains why voluntary provision of public goods usually fails and collective financing is needed.

Goods whose consumption generates more or less benefit than consumers perceive, due to information failure. Merit goods tend to be underconsumed and demerit goods overconsumed, giving grounds for subsidies, regulation or taxation.

A tax set equal to the marginal external cost of an activity, designed to make producers internalise the externality. In theory it moves output to the social optimum but is hard to calibrate in practice.

Inefficiency arising when public intervention makes outcomes worse than the market outcome it sought to correct. Causes include poor information, administrative costs, unintended incentives and political pressure.

The signalling, rationing and incentive functions of prices that guide resource allocation in a market economy. Rising prices signal scarcity, ration output among buyers and reward suppliers who expand production.

The way land, labour, capital and enterprise are distributed among competing uses. Economies allocate through markets, planning or a mix, and efficiency in allocation is a central criterion for judging any system.

An increase in real gross domestic product over time, or an outward shift of the production possibility frontier. It raises potential living standards but may create inflation, inequality or environmental costs.

A sustained rise in the general price level, measured by changes in a consumer price index. Demand-pull and cost-push causes are distinguished, and its effects depend on whether it is anticipated and how it compares with trading partners.

The proportion of the labour force actively seeking work but without a job. Types include frictional, structural, cyclical and seasonal, and the distinction matters because each calls for a different policy response.

The process by which an initial change in spending leads to a larger final change in national income, as recipients spend part of the extra income. The size depends on the marginal propensity to consume and to import.

The use of government spending and taxation to influence aggregate demand and supply. Expansionary policy raises spending or cuts taxes; contractionary policy does the reverse, with effects on the budget balance and debt.

Central bank action on interest rates, money supply or exchange rates to influence inflation and output. Transmission works through borrowing costs, asset prices, expectations and the exchange rate, usually with a time lag.

Measures intended to raise the productive capacity of the economy rather than aggregate demand. Examples include education and training, labour market reform, infrastructure and deregulation, with effects that appear only in the long run.

The ability to produce a good at a lower opportunity cost than another country. It explains why specialisation and trade can raise total output even when one country is absolutely less productive in everything.

Government measures restricting imports to shield domestic producers, such as tariffs, quotas and standards. Arguments include protecting infant industries and jobs; costs include higher prices and retaliation.

The ratio of a country's export prices to its import prices, usually expressed as an index. An improvement means a unit of exports buys more imports, though volume effects may still reduce real income.

A tax levied on spending, such as value added tax or an excise duty, collected by firms and passed on to consumers. Its incidence depends on the relative elasticities of demand and supply.

Charging different prices to different buyers for the same good when no cost difference justifies it. It requires market power and separable markets with different elasticities, and it may raise output or reduce welfare.

A technique comparing the social costs and benefits of a project, including non-market effects, often discounted over time. It is used to appraise public investment and to justify intervention where markets ignore external effects.

The responsiveness of quantity supplied to a change in price. Supply is more elastic when spare capacity exists, when the time period is longer, and when factors of production can move easily between uses.

Falls in long-run average cost as output expands, arising from specialisation, bulk buying, technical and financial advantages. They create a barrier to entry and can justify regulating natural monopolies.

A diagram showing a consumer's affordable combinations and the combinations giving equal satisfaction. The optimum is where the budget line is tangent to the highest attainable curve, used to derive demand and analyse income and substitution effects.

A model showing money, goods and factor services moving between households and firms, with injections of investment, government spending and exports and withdrawals of saving, taxes and imports. Equilibrium national income occurs when injections equal withdrawals.

The exam skill of using supplied data or documents as evidence, then weighing arguments to reach a supported judgement. Marks reward explicit criteria, awareness of counter-arguments and a conclusion that follows from the analysis.

The oral and written exam skill of allocating limited minutes to define terms, develop analysis with diagrams, evaluate and conclude. A brief plan before writing prevents imbalance and ensures every assessment objective is addressed.

The school-assessed component of the final grade, based on classwork and tests during the final year and on the pre-Baccalaureate examinations. It rewards consistent performance and can lift or lower the written examination result.

A school-set examination taken before the final session, modelled on the real paper in format and timing. Its results contribute to the preliminary mark and give candidates a realistic rehearsal under exam conditions.

Formative assessment gives feedback during learning to improve performance; summative assessment grades achievement at the end of a unit. Both feed the preliminary mark, so regular classwork and presentations carry real weight.