Economics terms in Introduction to economics

An increase in real output from using unemployed or inefficiently used resources, shown on a PPC as a movement from a point inside the curve towards the curve.

The three questions every economy must answer because of scarcity: what goods and services to produce and in what quantities, how to produce them, and for whom.

The branch of economics that uses insights from psychology to study how people actually make decisions, including the biases and rules of thumb that make behaviour depart from full rationality.

A factor of production made up of man-made goods used to produce other goods and services, such as machinery, tools, buildings and infrastructure; its factor income is interest.

An economic system in which most factors of production are privately owned and goods and services are produced for profit and allocated mainly through markets.

The assumption that all other variables are held constant, so that the effect of a change in one variable on another can be studied on its own; Latin for “other things being equal”.

The key concept that the economy is never static: economic variables, institutions, technology and society constantly change, and economics studies the causes and effects of those changes.

The need to decide between alternative uses of scarce resources; because not every want can be met, every choice involves giving something up, which is its opportunity cost.

An economic system that designs out waste and pollution and keeps products and materials in use for as long as possible through reuse, repair, remanufacturing and recycling.

A model of the economy showing how money flows between households and firms as spending and factor incomes, with leakages from and injections into the flow.

The school of economic thought from Adam Smith to the mid-19th century, which held that free markets allocate resources efficiently and that the economy tends towards full employment on its own.

The situation where each extra unit of one good costs the same amount of the other good given up, because resources are equally suited to both; shown by a straight-line PPC.

A statistical relationship in which two variables tend to move together; correlation alone does not prove that a change in one causes the change in the other.

The splitting of a production process into many small tasks, each done by a different worker who specialises in it, which raises output per worker.

Kate Raworth’s model in which the goal of an economy is to meet everyone’s basic needs (the social foundation) without overshooting the planet’s environmental limits (the ecological ceiling).

A good that is scarce, so its production or use has an opportunity cost, whether or not consumers pay a price for it.

A simplified representation of part of the economy, in words, diagrams or equations, that keeps only the variables thought to matter most in order to explain and predict behaviour.

The way a society organises the ownership of resources and makes decisions about what, how and for whom to produce, ranging from free market to planned economies.

A general explanation of how part of the economy works, built from linked hypotheses and assumptions, that has been tested repeatedly against evidence and not yet refuted.

The level of prosperity and quality of life of people, including financial security, the ability to meet basic needs and to make choices that bring satisfaction.

The social science that studies how individuals, firms, governments and societies choose to use scarce resources to satisfy their needs and wants, and the consequences of those choices.

Making the best possible use of scarce resources, so that the greatest useful output is obtained from given inputs, or the output society values most is produced with the least waste.

Information gained from observation, measurement or experiment in the real world, such as statistics or survey results, used to test hypotheses and theories.

A factor of production consisting of the ability to organise the other factors of production, take risks and start new businesses or ideas; its factor income is profit.

The situation in which people have the same amount of something, such as income, wealth or opportunities; a measurable, positive idea, unlike equity, which concerns fairness.

Fairness in the distribution of income, wealth or opportunities; a normative idea that is different from equality, which means everyone having the same.

Goods and services produced in one country and sold to buyers in other countries; export revenue is an injection into the circular flow of income.

The payments households receive for supplying factors of production: rent for land, wages for labour, interest for capital and profit for entrepreneurship.

The resources used to produce goods and services, grouped into four categories: land, labour, capital and entrepreneurship.

Banks and other financial institutions that take in savings from households and firms and lend them to borrowers, for example to finance investment.

Businesses that hire factors of production from households and use them to produce and sell goods and services.

Firms, households and governments in other countries that buy a country’s exports and sell it imports.

A good that is not scarce, so it has no opportunity cost: using more of it does not mean giving up anything else, such as air or seawater.

An economic system in which resources are privately owned and the basic economic questions are answered by consumers and firms through the price mechanism, with little government intervention.

The severe worldwide economic slump of the 1930s, in which output fell sharply and unemployment reached about a quarter of the US labour force in 1933.

An increase in an economy's capacity to produce, from more or better factors of production or improved technology, shown as an outward shift of the PPC.

Individuals or groups of people living together who own the factors of production, sell their services to firms for factor incomes and buy goods and services as consumers.

A testable statement about the relationship between two or more variables, proposed as a possible explanation and checked against empirical evidence.

Goods and services produced in other countries and bought by residents of the home country; spending on imports is a leakage from the circular flow of income.

The situation where each extra unit of one good costs more and more of the other good given up, because resources are not equally suited to both; shown by a PPC bowed outwards.

Spending added to the circular flow of income that does not come from households’ consumption: investment, government spending and export revenue.

The way individuals, firms, governments and countries depend on each other, so that the decisions of one economic actor affect others, often in ways they did not intend.

Government involvement in markets or the economy, through laws, regulations, taxes, spending or direct provision, usually to correct market outcomes or pursue goals such as equity.

Adam Smith’s image for the way individuals pursuing their own self-interest in competitive markets are guided by prices to promote the interests of society, without intending to.

The nine central ideas that run through IB Economics: scarcity, choice, efficiency, equity, economic well-being, sustainability, change, interdependence and intervention.

The school of thought based on John Maynard Keynes’s work, which holds that insufficient aggregate demand can keep an economy below full employment for long periods, so governments should actively manage demand.

A factor of production consisting of the physical and mental effort that people put into producing goods and services; its factor income is wages.

The view that governments should intervene as little as possible in markets and leave economic decisions to individuals and firms; French for “let do” or “leave alone”.

A factor of production covering all natural resources, including the land surface, minerals, forests, fish stocks, water and the climate; its factor income is rent.

Income taken out of the circular flow of income rather than spent on domestic goods and services: saving, taxes and spending on imports.

The branch of economics that studies the economy as a whole, including total output, unemployment, inflation, economic growth and the effects of government policies on them.

Decision-making that compares the additional (marginal) benefit of one more unit of an activity with its additional cost, rather than comparing totals or averages.

Any arrangement through which buyers and sellers exchange a good, service or factor of production, physically or online, at a price.

Karl Marx’s criticism of capitalism and of classical economics: workers are exploited because owners of capital keep the surplus value their labour creates, leading to inequality and recurring crises.

The branch of economics that studies the behaviour of individual decision-makers, such as consumers, firms and workers, and how individual markets and industries work.

An economic system that combines a market sector, where private firms and consumers make decisions through prices, with a public sector, where the government owns resources, provides services and regulates markets.

The school of thought, led by Milton Friedman, which holds that inflation is caused by the money supply growing faster than output, so governments should control money growth rather than manage demand actively.

A real-world event, such as a policy change in one place but not a similar neighbouring one, that lets economists compare an affected group with an unaffected one as if in a controlled experiment.

Needs are the goods and services required for survival, such as food, water and shelter; wants are everything else people desire beyond those needs.

The school of thought holding that markets clear quickly and people form rational expectations, so the economy tends to return to full employment on its own and active demand management is ineffective.

The part of economics that makes value judgments about what ought to happen, such as which goals matter most or which policy a government should choose; its statements cannot be proved true or false by evidence.

The value of the next best alternative given up when a choice is made.

An economic system in which the government owns most resources and central planners decide what, how and for whom to produce, rather than market prices.

The part of economics that describes and explains how the economy works using statements that can be tested against evidence, without value judgments about what ought to happen.

A curve showing the maximum combinations of two goods or services an economy can produce when all its resources are fully and efficiently employed, with given resources and technology.

The situation where goods are produced at the lowest possible cost, so that no more of one good can be produced without producing less of another; shown by any point on the PPC.

The difference between a firm’s total revenue and its total costs; it is also the factor income earned by entrepreneurship.

The rejection of a hypothesis or theory because empirical evidence contradicts its predictions; a scientific claim must be stated so that evidence could in principle refute it.

The part of income that households do not spend on consumption; it is a leakage from the circular flow of income.

The classical idea, named after Jean-Baptiste Say, that supply creates its own demand: the income earned from producing goods is spent on other goods, so there can be no general shortage of demand.

The basic economic problem that resources are limited while human needs and wants are unlimited, so not all needs and wants can be satisfied.

An academic discipline that studies human behaviour and the relationships between people in society, such as economics, psychology, sociology and political science.

Meeting the needs of the present generation without reducing the ability of future generations to meet their own needs, by limiting resource depletion and environmental damage.

A compulsory payment to the government, charged on incomes, profits, wealth or spending; taxes are a leakage from the circular flow of income.

A situation where having more of one thing means having less of another, because scarce resources can only be used once.

The situation where some factors of production, such as workers, machines or land, are not being used to produce, so output is below the economy’s potential; shown by a point inside the PPC.

The satisfaction or benefit a consumer gains from consuming a good or service.

A view about what is good or bad, fair or unfair, or what ought to be done, based on personal, ethical or political values rather than on facts that can be tested.