aEconomics HL Economics Definitions

Scarcity:

Opportunity Cost: The next best alternative foregone when an economic decision is made.

Capital: Physical capital refers to the tangibles factors of production. Human capital refers to the education and skills that human resources need to produce.

Inferior goods: Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.

Normal goods: Demand increases as income increases

Elasticity:

Format is this: A measure of the responsiveness of one variable to a change in another variable. Examples: PED, PES, YED.

Substitutes: Goods that can be used in place of each other, as they satisfy a similar need. Necessities: The degree to which a good is necessary or essential. Luxuries: Goods that are not considered essential by consumers.

Government Intervention:

Subsidy: An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers.

Indirect Tax: Taxes on expenditure to buy goods and services. Paid by producer to government, but also indirectly by consumers.

Price Floor: A minimum price imposed by an authority and set above the market price. Prices cannot fall below this price.

Price Ceiling: A maximum price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Market Failure: The failure of markets to achieve allocative efficiency. Markets fail to produce the output at which marginal social benefits are equal to marginal social costs; social or community surplus (consumer surplus + producer surplus) is not maximized.

Welfare Loss: A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal private benefits.

Allocative efficiency: Producing just the right amount of goods for the society’s optimum. It is where MSB = MSC.

Demerit Goods: Goods or services that not only harm the individuals who consume these but also society are large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.

Merit Goods: Goods or services considered to be beneficial for people that are underprovided by the market and so under-consumed, mainly due to positive consumption externalities.

Deregulation: Policies that reduce or eliminate regulations to decrease costs of production and leading to increased competition and higher levels of output.

Privatization: The sale of public assets to the private sector.

Direct Taxes: Taxes on income, profits, wealth, that are paid directly to the government.

Externalities

Externalities: External costs or benefits to third parties when a good or service is produced or consumed. An externality arises when an economic activity imposes costs or creates benefits on third parties for which they are not compensated or do not pay for respectively.

Common pool resources: Natural resources that are non-excludable, but the use is rivalrous.

Free goods: Goods that are so abundant they do not have an opportunity cost

Free rider problem: Consumers benefitting from goods without paying because they cannot be excluded from it.

Tragedy of commons: A situation where a group acts on behalf of self interest and depletes the common pool resources.

Pigouvian Taxes: Indirect taxes that eliminate the negative production or consumption externalities

Carbon (emissions) taxes Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.

Tradable Permits: Permits granted by the government that allow a certain maximum amount of pollution. These can be bought and sold.

Collective Self Governance: users of the common pool resources devise plans concerning obligations of the users to solve the tragedy of commons.

Public Goods: Goods or services that are non-rivalrous and also non-excludable.

Informal economy: Economic activity that is not recorded, regulated or taxed. The activities here are not included in a country’s national income figures.

Asymmetric information: A party of an economic transaction having more, or better information than the other.

Screening: Party with less information to gain more information.

Signalling: party with more information revealing more information to reduce adverse selection.

Moral hazard: A type of market failure where a party takes risks but does not face their full costs by changing the behaviour after a transaction has taken place. Basically insurance fraud.

Adverse selection: The type of market failure resulting from asymmetric information, where the party with incomplete information is induced to withdraw from the market.

Macroeconomics

Aggregate Demand: Planned spending on domestic goods and services at different average price levels, per period of time.

Aggregate supply: The level of output domestic firms are willing and able to offer at different average price levels.

Automatic stabilizers: Institutionally built in features of the economic that mitigates the fluctuations of the business cycle.

Gross Domestic Product (GDP): a measure of the value of aggregate output of an economy, it is the market value of all final goods and services produced within a country during a given time period (usually a year);

Gross National income: The income earned by all national factors of production independently of where they are located over a period of time; it is equal to GDP plus factor income earned abroad minus factor income paid abroad.

Nominal value: Sum of money value.

Real Value: Takes account for changes over periods of time

Interest rate: The cost of borrowing money or the reward for saving money over a period of time expressed as a percentage.

Full employment: the situation where unemployment equals the natural rate of unemployment, indicating the economy is producing at its potential output as determined by the Long-Run Aggregate Supply. All resources utilized efficiently.

Inflation: Sustained increase in average level of prices

Central bank: Institution that conducts monetary and fiscal policy, regulating commercial banks and providing banking services to commercial and government banks.

Purchasing power parity: A method used to make the buying power of different currencies equal to the buying power of 1 us dollar.

Policies

Expansionary/Contractionary Fiscal policy: Increase/decrease in government expenditure and/or increase/decrease in taxes that aim at changing aggregate demand.

Monetary policy: Changing interest rates to change aggregate demand.

Crowding out: Expansionary fiscal policy increases demand for money, leading to higher interest rates and cancelling out the effects of the policy in the first place.

Quantitative easing: Demand side policy of purchasing government bonds and other financial assets.

Objectives

Unemployment: When a person is actively looking for work, but is without a job.

Cyclical unemployment: Unemployment from decrease in aggregate demand in business cycle.

Natural rate of unemployment: The rate of unemployment when the market is at full potential output. The unemployment is equal to the sum of structural, frictional and seasonal unemployment.

Frictional unemployment: Unemployment of individuals who are in-between jobs, as people quit to find a better job or to move to a different location.

Poverty: Arises when a lack of material possessions or money prevent individuals from achieving a minimum satisfactory standard of living.

Poverty line: A level of income determined by a government or international body that is just enough to ensure a family can satisfy minimum needs for food, clothing and housing.

Poverty cycle: Any circular chain of events starting and ending with poverty.

Relative poverty: A comparative measure of poverty according to which income levels do not allow people to reach a standard of living that is typical of the society.

Deflation: Sustained decrease in average price levels.

Deflationary/recessionary gap: When equilibrium level of real output is lower than potential output as a result of low AD.

Disinflation: Decreasing level of inflation.

Economic growth: Growth in real GDP.

International

Free trade: International trade that is not subject to any trade barriers.

Exports: Goods and services produced in one country and purchased by consumers in another country.

Imports: The value of goods and services purchased domestically that are produced abroad.

Comparative advantage: When a country can produce a good at a lower opportunity cost compared to another country.

Absolute advantage: Can produce more with the same resources.

Tariff: A tax that is placed on imports to protect domestic industries from foreign competition and to raise revenue for the government.

Quotas: An import barrier that set limits on the quantity or value of imports that may be imported into a country.