Download Consolidated IB Econ review key terms and

Introduction to Economics
Key terms and Definitions
Economic problem:
Scarcity:
Land:
Labour:
Capital:
Enterprise:
Profit:
Rent:
Wages:
Interest:
Capital intensive:
Labour intensive:
Opportunity Cost:
PPC/PPF:
Consumption:
Investment:
Positive (economic) statements:
Normative (economic) statements:
Key Diagrams:
PPF/PPC curves to show:
a) trade off between consumption and investment
b) actual growth versus potential growth
c) economic growth versus economic development
Use a PPC to show the impact of greater capital investment in S.Korea
Use a PPC to show the impact on the Spanish economy due to
a rise in unemployment
Use a PPC to show economic growth but not development
In assessment, make sure you………
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Know that the three basic economic questions that must be answered by any economic system are:
“What to produce?”, “How to produce?” and “For whom to produce?”. In a mixed and market
economic system the price/market mechanism is fundamental in providing an answer to these
questions (see later).
Section 1: Microeconomics review: Key terms and definitions (HL only = bold)
Demand
Quantity demanded
Ceteris Paribus
Substitute effect
Income effect
Utility
Marginal Utility
Complementary goods/joint demand
Substitute goods/competitive demand
Normal goods
Inferior goods
Superior goods
Supply
Quantity supplied
Complementary producer good
Substitute producer good
Market equilibrium
Surplus
Shortage
Price mechanism- Price as a signalling device, rationing device & profit incentive
Maximum price
Minimum price
Parallel market
Price elasticity of demand
Inelastic demand
Elastic demand
XED
YED
PES
Tax
Subsidy
Specific tax
Ad valorem tax
Tax incidence/burden
Market failure
Social costs (Marginal)
Social benefits (Marginal)
Externalities
Positive externalities/external benefits
Negative externalities/external costs
Public goods/Private goods
Rivalry/Non rivalry
Excludability/non excludability
Merit goods
Demerit goods
Welfare loss
Consumer surplus
Producer surplus
Short run and long run cost periods
Total cost
Fixed cost
Variable cost
Marginal cost
Average cost
Marginal product
Total product
Average product
Economics of scale
Total revenue
Average revenue
Marginal revenue
Economic Profit
Normal profit
Abnormal profit
Economic loss/Sub normal profit
Profit maximisation
Revenue maximisation
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
Natural monopoly
Barriers to entry/exit
Sunk costs
Price makers/takers
Productive efficiency
Allocative efficiency
Social efficiency
Price competition and non-price competition
Price discrimination
Contestable markets
Key Diagrams:
Market demand and supply to show:
 Equilibrium market price and quantity
 Changes in the conditions of demand and supply and subsequent effects on above
 Effects of tax and subsidy on market price and quantity
 The incidence/burden of taxation/subsidy
 Max price scheme
 Min price scheme
 Buffer stock scheme
 Surplus and shortage
 Elasticities of demand and supply
Diagram to show relationship between income and quantity demanded for normal and inferior goods
Show impact of falling oil & coal prices on market for renewable energy
Show government intervention when price falls below min price in market for rice
Show burden of an ad valorem tax on airfares on the market for
airline travel
Show price acting as a signalling and rationing device
In assessment, make sure you……….
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Always try to apply a relevant example in supply/demand diagrams
Use terminology correctly e.g. know when to use quantity demanded rather than demand
Apply the concept of elasticity when relevant. Inelastic demand is relevant to a variety of productsnecessities, those with few substitutes, general product categories (e.g. cars as opposed to a particular
brand of car). Inelastic supply is particularly relevant to agricultural produce and goods that take
time to produce.
Know the reasons why the demand curve slopes downward and supply slopes upwards
Use terminology associated with elasticities appropriately- refer to a change in price that leads to a
proportionality larger/smaller change in quantity demanded/supplied
Know the significance of PED on revenue when price changes (due to supply changing). This is an
important concept for microeconomics (significance of PED for business decisions, impact of tax on
producers, kinked demand curve for a firm in oligopoly (HL)), International trade (impact of a
depreciation/appreciation of currency on export revenue/import expenditure, relationship between
terms of trade and BOT (HL) & Development economics (impact of variable supply on the producers
of primary commodities with inelastic demand)
Market failure diagrams
MSC/MSB diagram to show:
 Market failure associated with:
 Positive externalities of consumption (merit goods, public goods)
 Negative externalities of consumption (demerit goods)
 Positive externalities of production
 Negative externalities of production
 Profit maximising output versus socially efficient output
 Welfare loss
Show potential welfare gain associated with tertiary education
Show welfare loss associated with coal fired power stations
In assessment, make sure you……….
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Always try to apply a relevant example. Use the good/service that you may have used for your IA
commentary and the relevant government policy
If referring to a tax on a demerit good/polluter or a subsidy to a producer of a merit good, use the term
‘internalising the externality’- I love it.
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If the question asks’ ‘To what extent should governments…….’ the examiner is looking for you to
recognise that government intervention may lead to government failure and that often markets left
alone are simply the best way to allocate resources (when market failure is relatively insignificant)
HL Diagrams
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Diagram to show relationship between fixed costs, variable costs and total costs
Diagram showing economies and diseconomies of scale on LRAC curve
Diagram to show relationship between marginal product and average product
Output positions for a firm in perfect competition- used to show:
 Short run and long run output positions (must use in conjunction with market supply and
demand)
 Productive and allocative efficiency
 Shut down output position
Output positions for a firm in monopoly- used to show:
 Possible profit situations in monopoly
 Revenue maximisation position
 Productive and allocative efficiency (or lack of)
Output positions for a firm in monopolistic competition- used to show:
 Short run and long run output positions
 Productive and allocative efficiency (or lack of)
 Possible profit situations in monopolistic competition
Output positions for a firm in oligopoly- used to show:
 Possible profit situations in oligopoly
 Price fixing agreement – firms act as monopoly
The Kinked Demand Curve- used to show:
 Price rigidity in oligopolies
Output and pricing positions for a firm practising (third degree) price discrimination
Use both diagrams to show the long run adjustment process in perfect comp. on the market for oranges (left) and a firm (right) if the firm is earning abnormal profits
Show the shutdown price & output for a firm in per. competition
Show how a monopolist can produce at a higher output level and lower price than a
firm in per comp.
Show the welfare loss that exists when a monopolist maximises profit rather
than being allocatively efficient
Show price rigidity for a non-collusive firm in oligopoly
In assessment, make sure you……….
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Know the difference between the long run adjustment process in perfect comp. and mono. comp.
When comparing market structures compare characteristics, behaviour and performance and
ALWAYS compare levels of efficiency
If you are asked to evaluate the desirability of a market structure, ask yourself, desirable for
whom? Firms in the market structure? Consumers? The government? Society?
Remember the golden rule of drawing output/price diagrams for firms in any market structure:
1. AR 2. MR 3. MC 4. PMO 5. AC 6. Profit/loss
Macroeconomics review: (HL only – bold)
Key terms/definitions:
National income
GDP
National Output v. Domestic Output
Gross National Income v. Net National Income
Real GDP versus Nominal
GDP per capita
Green GDP
Economic growth
Economic development
Aggregate demand
Consumption
Investment
Net exports
Fiscal policy (expansionary/deflationary)
Monetary policy (expansionary/deflationary)
Interest rates
APC
APS
Durable goods v. non durable goods
Disposable income
Real income/Purchasing power
Aggregate supply
LRAS
Macroeconomic equilibrium
Output gap
Recessionary gap
Inflationary gap
Recession
The multiplier
Inflation
Deflation
Disinflation
Demand pull inflation
Cost push inflation
RPI/CPI
Producer Price Index
Unemployment
Unemployment rate
Derived demand
Labour force
Structural unemployment
Seasonal unemployment
Frictional unemployment
Real wage rate unemployment
Demand deficient unemployment
Equilibrium unemployment
Disequilibrium unemployment
Taxation
Direct taxes
Indirect taxes
Regressive taxes
Progressive taxes
Proportional taxes
Budget deficit v. surplus
National debt
Current expenditures
Capital expenditures
Transfer payments
Gini coefficient/index
Automatic stabilisers
Key diagrams:
Circular flow of income used to show:
 National income
 Leakages and injections
 The effects of the multiplier (perhaps)
Investment schedule: used to show:
 Relationship between level of investment and interest rates
Macroeconomic equilibrium: used to show:
 Changes in AD caused by changes in components of AD
 Changes in SRAS caused by supply side shocks & changes to costs of production
 Changes in LRAS caused by supply side policies
 Effects of policies: demand side and supply side, fiscal, monetary, x-rate etc
 All show impact on price level and output level
 Output gaps- recessionary and inflationary
 Inflation (cost push and demand pull)
Keynesian versus Neo-classical LRAS: used to show:
 Differences in opinion between two schools of thought on Long Run equilibrium in economy
 Use Keynesian LRAS to illustrate the effects of demand deficient unemployment
 The differing impacts of demand side policies on a Keynesian and Neo-classical long run equilibrium
The business/trade cycle: used to show:
 Fluctuations in economic output and long run trends
The Labour market: used to show
 Equilibrium unemployment (search/seasonal/structural) – include ADL, ASL and LF
 Disequilibrium unemployment (real wage rate & demand deficient) show ASL>ADL at equilibrium
wage rate
Lorenz curve: used to show:
 income distribution/income inequality
 Gini coefficient
The Phillips curve: used to show:
 Trade off between unemployment and inflation
HL: The LR Phillips curve: used to show:
 Natural rate of unemployment
Macroeconomic diagrams
Show the existence of equilibrium unemployment
Using an AD/AS diagram, show the impact of supply side policies on an
economy
Without using an AD/AS diagram, show the impact of supply side policies on an
economy
Show good deflation
HL- show the impact of the multiplier on national output due to an increase in
exports
Show the impact of progressive taxes on income distribution
Show how expansionary fiscal policy can close a recessionary gap
Show how, in the neo-classical model , the economy will always return to
fully employment level of output despite an increase in AD
Show how an increase in AD might not result in inflation on the Keynesian LRAS
model
Show a reduction in disequilibrium unemployment
HL- Using a LR Phillips curve, show the impact of a rise in AD on the natural
rate of unemployment and on inflation
Show the impact of rising interest rates on Investment
In assessment, make sure you……….
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Use the SRAS curve when showing cost-push inflation
Use the correct labelling for AD/AS diagrams- Price Level, Output (Real GDP), Y, P.
Know why the AD curve slopes downward (wealth effect, interest rate effect, net export effect)
Use YFE when labelling full employment output on the x-axis
Draw a Keynesian LRAS curve with a clear horizontal section, upward sloping section and vertical
section
Know why the Keynesian LRAS curve has horizontal, upward sloping and vertical sections
Recognise that supply side policies are designed to increase level of potential output (shift of
LRAS/shift out of PPC). They can also lead to lower business costs therefore shifting out SRAS.
Recognise that demand side policies generally influence AD, but some also act of supply side
policies and therefore influence SRAS/LRAS. For example, lower income tax, lower corporate tax,
lower indirect taxes, investment in training, education, new technology and infrastructure
Know the difference between interventionist supply side policies and market based supply side
policies
Know supply side polices aimed specifically at improving labour market flexibility
Use correct labelling for labour market diagrams- ADL, ASL, LF, wage rate and quantity of labour
Recognise that different causes of unemployment have different degrees of severity & therefore
require different levels (and types) of government intervention
Recognise that low unemployment can result in inflationary pressures (AD/AS diagram). This is
a classic macroeconomic trade off (Phillips Curve)
Know that there are a wide variety of government revenue sources – taxation, national
insurance/social insurance contributions, profits from nationalised industries, privatisation, sale of
government land or lease of land.
Know a variety of areas of government expenditure (defence, education, pensions etc).
Know the impact of progressive, regressive and proportional taxes on income distribution.
Know how governments support lower income groups through transfer payments and the providing
of direct benefits (Benefits in kind)
Apply real world examples!!!
— Demand deficient unemployment in US during Great Depression and Roosevelt’s
expansionary fiscal policy (as advocated by Keynes) to create jobs.
— Demand deficient unemployment in US after 2008 financial crash and Obama’s expansionary
fiscal policy to create jobs.
— Interest rates currently at all time lows (0.5% in many countries & even negative interest rates
in Japan!!).
— Austerity policies (contractionary fiscal policy) currently in UK, Ireland, Spain and Greece to
reduce national debt and budget deficits.
— Current expansionary monetary policy & devaluation of RMB in China to stimulate economic
growth
— Demand pull inflation caused by high consumer & business confidence and Government
spending on Vietnam war in USA in 1960’s
— Bad deflation in Japan during 1990’s & 2000’s as a result of falling consumer spending & low
business confidence
Key terms and diagrams: International trade (HL only = bold)
International trade
Factor endowments
HL: Absolute advantage
HL: Comparative advantage
Free trade
Protectionism
Infant industries
Declining industries
Dumping
Tariffs
Quotas
Export subsidy
Embargo
Globalisation
MNE
FDI
Trading blocs
Free Trade Areas
Customs Unions
Common Market
Monetary Union
HL Trade Creation
HL Trade Diversion
Exchange rate
Fixed x-rate
Floating x-rate
Managed x-rate
Appreciation and depreciation
Revaluation and devaluation
Balance of Payments
Current Account
Trade balance
Current account surplus/deficit
Capital account
Financial account
Expenditure switching policies
Expenditure reducing polices
Terms of trade
Deteriorating terms of trade
Improvement in terms of trade
Key diagrams:
HL- PPF/PPC curves to show:
 Gains from specialisation and trade
 Comparative and absolute advantage
Tariff diagram to show:
 Impact onEquilibrium market price and quantity, world producers, domestic producers, domestic consumers,
government revenue, loss of consumer surplus, welfare loss.
Quota diagram to show:
 Impact onEquilibrium market price and quantity, world producers, domestic producers, domestic consumers,
loss of consumer surplus, welfare loss
Protectionist subsidy diagram to show:
 Impact onEquilibrium market price and quantity, world producers, domestic producers, domestic consumers,
government spending & welfare loss
Foreign Exchange market diagram to show:
 Changes in demand and supply of currency and subsequent impact on equilibrium value of currency
in terms of another currency.
 Differences between fixed and floating x-rate systems
HL- The J curve to show
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Correction of current account deficit over time due to Marshall Lerner condition
International trade diagrams
Show the impact of reduced interest rates in Japan on the value of Japanese Yen
Show the impact of a domestic subsidy to protect domestic farmers of
olive oil in the EU
Show the impact of increased tariffs on Chinese solar panels in the US market
Show the impact of inflation in Argentina on the Argentinian peso
HL- show trade creation that might occur if Turkey joins the EU
Show the impact of interventionist buying of the RMB by the Peoples Bank of China
In assessment, make sure you……….
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For two mark definitions, try to have two points for each definition.
In four mark ‘explain using a diagram……..’ questions, make sure you respond to what exactly the
question asks in your explanation.
Be prepared to use micro and macroeconomic definitions, diagrams and concepts in both data
response questions (international trade and development economics)
Label quota, tariff, and domestic subsidy diagrams correctly (Price, quantity, domestic supply,
domestic demand, world supply)
Don’t get confused between and export subsidy and domestic subsidy used for protectionism
Label exchange rate diagrams correctly (price of $ in terms of Euro, quantity of $, supply of $,
demand for $)
Know the main factors that cause an increase the demand for a currency (increase in demand for
exports, speculation buying, higher interest rates, Central Bank intervention buying, deflation)
Know the main factors that cause an increase in the supply of a currency (increase in demand for
imports, speculation selling, lower interest rates, inflation, Central Bank intervention selling)
Don’t confuse depreciation with deflation!!!!!
Don’t confuse appreciation with inflation!!!!!
Know that a currency appreciation makes imports cheaper and exports more expensive
Know that a currency depreciation makes imports more expensive (particularly raw materials) and
exports cheaper
Recognise that PED for imports and exports plays a MASSIVE/HUGE/SIGNIFICANT
impact on export revenue and import expenditure as a result of exchange rate fluctuations and
therefore affects Bal. of Trade/Current Account Bal./Net Exports accordingly.
Recognise that the Balance of Trade and Current Account Balance are often used synonymously
but they are not exactly the same
Know that FDI flows into a country are credited in the Financial account (of the country where
investment is made) but any profits sent back abroad are debited in the Current account.
Development Economics – Key terms
ELDC (characteristics)
EMDC (characteristics)
Underemployment
Infrastructure
Property rights
Informal markets
Indebtedness
Capital flight
Poverty trap/cycle (all key diagram)
Export promotion/outward orientation strategies
Import substitution/inward-orientated strategies
Micro-finance
Aid
Tied aid
Multilateral aid
Bilateral aid
Grants
Indebtedness
Sustainable development
Key diagrams: Poverty cycle
In assessment, make sure you……….
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Be prepared to use micro and macroeconomic definitions, diagrams and concepts in both data
response questions (international trade and development economics)
Know the difference between GDP per capita/GNY per capita/GDP per capita at PPP
Evaluate the use of GDP per capita and/or HDI as a measure of economic growth and development
Be prepared to evaluate the role of MNEs/FDI on economic growth & development
Be prepared to evaluate the role of different types of foreign aid on economic growth & development
Be prepared to argue for and against debt relief for Highly Indebted Poor Countries
Recognise the barriers to economic growth and development that exist in some LDCs (notably
lack of infrastructure-road, rail and electricity networks, poor governance and associated corruption,
brain drain, indebtedness, aid dependence, low tax revenue due to huge informal economies and
underemployment/unemployment)
Recognise the strengths & limitations of export promotion strategies
Recognise the strengths & limitations of import substitution strategies
Evaluate the role the government should play in economic development (interventionist strategies)
Evaluate the role the market should play in economic development (market orientated policies)