IB Economics HL 2023 with complete solution

Ceteris paribus all other things are being held equal positive economics matters of economics that can be proven to be right or wrong by looking at the facts normative economics matters of economics that are based upon opinion and so are incapable of being proven to be right or wrong scarcity the limited availability of economic resources relative to societys unlimited demand for goods and services land the physical factor of production. It consists of natural resources labour the human factor of production. It is the physical and mental contribution of the existing work force to production capital the factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment entrepreneurship the factor of production involving organizing and risk-taking opportunity cost is the next best alternative foregone when an economic decision is made free good goods or services which are unlimited in supply and have no opportunity cost. the have unlimited supply at market price zero economic good a good or services which is relatively scarce and so have a price. An opportunity cost is involved if it is consumed. utility the satisfaction or pleasure that an individual derives from the consumption of a good or service production possibility curve shows the maximum combination of outputs that can be production by an economy in a given time period actual output the actual production of goods and services in an economy over a given time period actual growth occurs when previously unemployed factors are put into production. It is represented by an movement from a point within a PPC to a new point nearer to the PPC Potential output the possible production that would be possible in an economy if all available factors were being employed. Potential growth occurs when the quantity/quality of factors of production within an economy is increased. It is presented with an outward shift of the PPC. Economic growth the growth of real output in an economy over time. Usually measured in real GDP economic development a broad concept which involves improvement in standard of living, reducing in poverty, improved health and education. sustainable development development that meets the needs of the present without compromising the ability of future generations to meet their own needs free market economy an economy where the means of production are privetly held by individuals and firms. Demand and supply determine how much to produce, how/how many to produce, an for whom to produce. planned economy an economy where the means of production are owned by the state. The state determines how much to produce how much to produce, how/how many to produce, and for whom to produce. Transition economy an economy in the process of moving from a centrally planned economic system towards a more market-oriented economic system. demand the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period law of demand as a price of a good falls, quantity demanded increases velben goods goods that are the exceptions to the law of demand, where at high prices, as price increases, then so does the demand giffen goods goods that are exceptions to the law of demand where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand supply the willigness and ability of a producer to produce a good or service at a given price law of supply as the price of a good rises the quantity supplied rises maximum price a price imposed by the authority and set below the market price minimum price a price imposed by the authority and set above the market price buffer stock scheme a situation where a government intervenes in a market to stabilize prices by buying up surplus stock when prices would go too low or by supplying stock from a previously built up 'buffer stock' when prices would go too high price elasticity of demand a measure of responsiveness of the quantity demanded of a good or service when there is a change in its price elastic demand where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded inelastic demand where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded cross price elasticity measure of the responsiveness of the demand for one good or service to a change in price for another good or service income elasticity measure of the responsiveness of demand for a good or service to a change in income normal goods a good where the demand increases as income increases inferior goods a good where the demand for it decreases as income increases price elasticity of supply measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price elastic supply where a change in price of a good or service leads to a proportionately larger change in the quantity supplied inelastic supply where a change in price of a good or service leads to a proportionately smaller change in the quantity supplied indirect tax tax on expenditure. It is added to the selling price of a good or service flat rate tax an indirect tax where a specific amount is added to the selling price of each unit ad valorem tax an indirect tax where a percentage is added to the selling price of each unit subsidy an amount paid by the government to a firm per unit of output fixed costs costs that do not change with the level of output. variable costs costs that vary with the level of output total costs fixed costs plus variable costs average cost total cost/quantity produced. the ____cost of production per unit marginal cost additional cost of producing one more unit of output economic cost the total cost of production, including opportunity cost short run the period of time in which at least one factor of production is fixed law of diminishing average returns as extra units of variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish law of diminishing marginal returns as extra units of a marginal factor are applied to a fixed factor, the output from each extra unit of marginal factor will eventually diminish long run the period of time in which all factors of production are variable economies of scale they are a fall in long run unit average costs that come about as a result of a firm increasing its scale of production diseconomies of scale they are an increase in long run unit average costs that come about as a result of a firm increasing its scale of production total revenue the aggregate revenue gained by a firm from the sale of a particular quantity of output average revenue total revenue received divided by the number of units sold marginal revenue the extra revenue gained from selling one more unit of a good or service normal profits the amount of revenue needed to cover the total costs of production including opportunity cost abnormal profits the level of profit that is greater than the total costs of production including opportunity cost profit maximizing level of output the level of output where marginal revenue is equal to marginal cost shut down price the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run break even price the price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run allocative efficiency the level of output where marginal cost is equal to average revenue. productive efficiency when production is achieved at lowest cost per unit of output perfect competition market structure where there are a very large number of small firms, homogeneous goods, price takers, no barriers and perfect knowledge monopolistic competition market structure where that are many buyers and sellers, producing differentiated products, no barriers oligopoly market structure where there are few large firms that dominate the market. Many different prices or output collusive oligopoly where a few firms in a oligopoly act together to avoid competition by resorting to agreements to fix prices or output non-collusive oligopoly where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. cartel a group of firms in an industry that join together to fix prices. monopoly a market form where there is only one firm in the industry natural monopoly a situation where there are only enough economies of scale available in a market to support one firm contestable market a market that appears to be an oligopoly or monopoly, where the threat of potential competition forces firms to behave in a more competitive manner than theory would predict price discrimination it occurs when a producer charges different prices to different customers for an identical good or service market failure the failure of markets to produce at the socially efficient level of output positive externalities they are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed negative externalities they are the 'bad' effects that are suffered by a third party when a good or service is produced or consumed sustainable development development that meet the needs of the present generation without compromising the ability of future generations to meet their own needs public good goods and services which would not be provided at all by the market - non-rivalry and non-diminishability merit goods goods or services considered to be beneficial for people that would be under-provided by the market and so under-consumed demerit goods goods and services considered to be harmful to people that would be over-provided by the market and so over-consumed. tradable permits they are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. circular flow of income a simplified model of the economy that shows the flow of money through the economy real gdp the total money value of all final goods and services produced in an economy in one year, adjusted to inflation aggregate demand the total spending in an economy consisting of consumption, investment, government expenditure and net exports consumption spending by households on consumer goods and services investment the addition of capital stock to the economy or expenditure by firms on capital inflationary gap the situation where the equilibrium level of output is greater than the full employment level of output deflationary gap the situation where the equilibrium level of output is less than the full employment level of output, thus causing unemployment fiscal policy a policy using government spending and/or direct taxation to achieve economic objectives monetary policy a policy using changes to money supply or interest rates to achieve economic objectives aggregate supply the total amount of domestic goods and services supplied by businesses and the government, including both consumer and capital goods multiplier the ratio of an included change in the level of national income to an original change in one or more of the injections into the circular flow of income accelerator the relationship between the level o induced investment and the rate of change of national income crowding out a situation where the government spends more than it receives and needs to borrow money, forcing up interest rates and pushing private investment and private consumption. unemployment the number of people without a job, who are actively seeking work full employment exists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work underemployment exists when workers are carrying out jobs for which they are over-qualified structural unemployment unemployment that exists when in long-term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour frictional unemployment exists when people have left their job and are in the process of searching for another job seasonal unemployment exists when people are out of work because their usual job is out of season demand deficient unemployment unemployment that exists when there in insufficient demand in the economy and wages do not fall to compensate this real wage unemployment exists when wages in the economy are held above the equilibrium wage rate, either by the government or trade unions inflation a sustainable increase in the general or average level of prices and a fall in the value of money phillips curve showing the inverse relationship between the rate of unemployment and the rate of inflation, which suggests a trade-off direct taxation taxation imposed on peoples income or wealth, and on a firms profit laffer curve showing the possible relationship between income tax rates and total tax revenue lorenz curve showing what percentage of the population earns what percentage of the total income in the economy. gini coefficient measures the ratio of the area between a lorenz curve and the line of absolute equality to the total area under the line of equality factor endowment factors of production that a country has available to product goods and services absolute advantage where a country is able to produce more output than other countries using the same input of factors of production comparative advantage where a country is able to produce a good at a lower opportunity cost of resources than another country free trade international trade that takes place without any barriers tariff a duty tax that is placed upon imports to protect domestic industries from foreign competition quota import barriers that set limits on the quantity or value of imports that may be imported into a country dumping selling of a good in another country at a price below its unit cost of production customs union an agreement made between countries where the countries agree to trade freely among themselves and also agree to adopt common external barriers against any country attempting to import into the ______ common market a customs union with common policies on product regulation, and free movement of goods,services, capital, and labour trade creation occurs when the entry of a country into a customs union leads to the production of a good moving from a high-cost producer to a low-cost producer trade diversion occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer to a high-cost producer balance of payments record of the value of all transactions between the residents of a country with the residents of all other countries over a given time period current account a measure of the flow of funds from trade in goods and services plus net investment income flows and net transfers of money capital account a measure of the buying and selling of assets between countries. exchange rate the value of one currency expression in term of another fixed exchange rate an exchange rate regime where the value of a currency is fixed to the value of another currency floating exchange rate an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market depreciation a fall in the value of one currency in terms of another currency in a floating exchange rate system appreciation an increase in the value of one currency in terms of another in a floating exchange rate system devaluation a decrease in the value of a currency in a fixed exchange rate system revaluation an increase in the value of a currency in a fixed exchange rate system current account surplus where the revenue from the export of goods and services and income flows is greater than the spending on import good and services and income flows in a given year current account deficit where revenue from the exports of goods and services and income flows are less than the spending on the import of goods and services and income flows in a given year marshall lerner condition states that a depreciation or devaluation of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus the elasticity of demand for imports is inelastic j-curve suggests that in the short term, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term terms of trade an index that shows the value of a country's prices relative to their average import prices