IB Economics SL flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Opportunity cost

The value of the next best alternative forgone when a choice is made. It is measured in real terms as the quantity of the sacrificed good, not in money.

Production possibility curve

A curve showing the maximum combinations of two goods an economy can produce with given resources and technology. Points inside are inefficient; points outside are unattainable.

Ceteris paribus

A Latin phrase meaning all other things being equal. Economists hold other variables constant to isolate the effect of a single factor in a model.

Normative statement

A value judgement about what ought to be, which cannot be tested against evidence. It contrasts with a positive statement, which is a testable claim about what is.

Law of demand

The principle that price and quantity demanded are inversely related, ceteris paribus. A price change moves along the curve; other influences shift the whole curve.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Demand is elastic when the absolute value exceeds one and inelastic when it is below one.

Income elasticity of demand

Percentage change in quantity demanded divided by percentage change in income. Positive for normal goods, negative for inferior goods, and above one for luxury goods.

Market equilibrium

The price at which quantity demanded equals quantity supplied. Above it a surplus pushes price down; below it a shortage pushes price up.

Allocative efficiency

The condition where marginal social benefit equals marginal social cost, so total surplus is maximised. In a competitive market this occurs at the equilibrium quantity.

Consumer surplus

The difference between what consumers are willing to pay and the price they actually pay. It is the area below the demand curve and above the market price.

Negative externality of production

A cost of production borne by third parties, such as pollution. Marginal social cost exceeds marginal private cost, so the market overproduces relative to the social optimum.

Public good

A good that is non-rival and non-excludable, such as national defence. The free-rider problem means private markets underprovide it, justifying government provision.

Common access resource

A resource that is rival but non-excludable, such as ocean fish stocks. Without property rights it is overused, producing the tragedy of the commons.

Price ceiling

A maximum price set below equilibrium, intended to make a good affordable. It creates excess demand, shortages, queues and black markets.

Pigouvian tax

A tax set equal to the marginal external cost of production. It internalises the externality, raising private cost to social cost and reducing output to the social optimum.

Tax incidence

The division of an indirect tax burden between consumers and producers. The side with more inelastic demand or supply bears the larger share.

Aggregate demand

Total planned spending on domestic output: consumption plus investment plus government spending plus net exports. The curve slopes down due to wealth, interest and trade effects.

Long-run aggregate supply

A vertical curve at potential output, determined by the quantity and quality of factors of production and technology. It shifts only with supply-side changes.

Demand-pull inflation

Inflation caused by aggregate demand growing faster than the economy's productive capacity. It is associated with a positive output gap and falling unemployment.

Structural unemployment

Unemployment caused by a mismatch between workers' skills or location and available jobs, often from technological change or deindustrialisation. It forms part of the natural rate.

Output gap

The difference between actual and potential GDP, expressed as a percentage of potential. A negative gap signals spare capacity; a positive gap signals inflationary pressure.

Fiscal multiplier

The total change in equilibrium output caused by an initial change in spending, equal to one divided by one minus the marginal propensity to consume.

Automatic stabilisers

Features such as progressive taxes and unemployment benefits that dampen fluctuations without discretionary action, reducing tax revenue and raising spending in a downturn.

Monetary policy transmission

The channels through which interest rate changes affect aggregate demand: consumption, investment, net exports and asset prices. It weakens when confidence is very low.

Supply-side policy

Measures intended to shift long-run aggregate supply right, such as deregulation, labour-market reform, education and infrastructure. They raise potential output but act slowly.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another country. Specialising according to comparative advantage raises total output and gains from trade.

Marshall-Lerner condition

The condition that a currency depreciation improves the trade balance only if the sum of the price elasticities of export and import demand exceeds one.

Current account

The balance of payments record of trade in goods and services plus income flows and transfers. A deficit must be financed by financial account inflows.

Trade diversion

A consequence of a customs union where imports switch from a cheaper non-member to a more expensive member because of the common external tariff, reducing welfare.

Human Development Index

A composite measure of development combining life expectancy, education and gross national income per capita. It broadens development beyond income alone.

Poverty trap

A self-reinforcing cycle in which low income limits saving and investment, which keeps productivity and income low. Breaking it requires external finance or institutional reform.

Globalization

The growing integration of economies through trade, foreign direct investment, capital flows and information exchange. It brings market access and technology but also vulnerability to shocks.