IB Economics ch 1: Foundations Of Economics
Terms in this set (26)
The study of the behaviour of individual consumers, firms, and industries and the determination of market prices and quantities of goods, services, and factors of production.
The study of aggregate economic activity. It investigates how the economy as a whole works.
An assumption that all other variables are being held equal, when a single variable is being altered in an economic model.
Examines matters of economics that can be proven to be right or wrong by looking at the facts. Example, economic growth in the UAE in 2008 was 3.2%.
Examines matters of economics that are based upon opinion and so are incapable of being proven to be right or wrong. Example, economic growth in the UAE should have been higher in 2008.
The limited availability of economic resources relative to society's unlimited demand for goods and services.
Factors of production
The resources, comprising land, labor, capital and entrepreneurship, that are needed for the production of goods and services.
The physical factor of production. It consists of natural resources, some of which are renewable (example, wheat) and some of which are non-renewable (example, iron ore).
The human factor of production. It is the physical and mental contribution of the existing work force to production.
The factor of production that comes from investment in physical capital and human capital. Physical capital is made by humans and is used to produce goods and services. It occurs as a result of investment. Investment in human capital can occur through things such education or improved health care.
The factor of production involving organising the other three factors of production and also involves risk-taking.
It is the next best alternative foregone when an economic decision is made.
Goods or services which are unlimited in supply and have no opportunity cost are free goods. Examples, air and sea water. A free good has an unlimited supply at market price zero.
A good or service which is relatively scarce and so has a price. An opportunity cost is involved when it is produced and consumed.
The satisfaction or pleasure that an individual derives from the consumption of a good or service.
Production possibilities curve
It shows the maximum combinations of goods and services (potential output) that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is unchanged.
The actual production of goods and services in an economy achieved in a given time period.
This occurs when previously unemployed factors of production are brought into use. (More efficient use of resources.) It is represented by a movement from a point within a PPC to a new point nearer to the PPC.
The possible production that would be achieved in an economy if all available factors were being employed.
This occurs when the quantity and/or quality of factors of production within an economy is increased. It is represented by an outward shift of the PPC.
The growth of real output in an economy over time. It is usually measured as growth in real gross domestic product (GDP).
A broad concept involving improvement in standards of living, reduction in poverty, improved health and improved education. Increased freedom and economic choice may also be included.
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Free market economy (market economy)
An economy where the means of production are privately held by individuals and firms. Demand and supply determine what to produce, how to produce it, and for whom to produce.
Planned economy (command economy)
An economy where the means of production are owned by the state. The state determines what to produce, how to produce it, and for whom to produce.
A mixed economy is one in which economic decisions are determined by both market forces and by the state.