IB Microeconomics

• Abnormal profit (economic profit, supernormal profit)(HL)

  when a firm's revenue is greater than the total costs of production, including opportunity costs
• Explicit costs (HL)

  the costs of the resources (land, labour, capital, enterprise) used to produce a good or service.
• Actual output


  the amount of goods and services an economy really produces, which is likely to be under the potential output since some resources are not used to maximum efficiency
• Ad valorem tax


  a tax that is a percentage of the price of the good; VAT is an example
• Allocate


  to distribute, to make decisions about who gets what
• Allocative efficiency (HL)


  the level of output where marginal cost is equal to average revenue or price. The firm sells the last unit it produces at the amount that it cost it to make it.
• Imperfect information (HL)

  a situation where one party in a transaction has more or better information than the other; can cause transactions or entire markets to fail
• Average cost (HL)


  the average (total) cost of production per unit. It is calculated by dividing the total cost by output (TC/Q)
• Average fixed cost (HL)

  total fixed costs (that do not vary with output) divided by the output (FC/Q)
• Average product (HL)


  the output that is produced, on average, by each unit of the variable factor. (AP = TP/V)
• Average revenue (HL)


  total revenue received divided by the number of units sold (TR/Q). Usually, price is equal to average revenue (P=AR)
• Average variable cost (HL)


  a firm's variable costs (labor, electricity, etc.) divided by the quantity (Q) of output produced (AVC=VC/Q)
• Barriers to entry (HL)

  obstacles that may prevent potential newcomers from entering a market
• Black market


  illegal trade in a good or service
• Brand loyalty (HL)


  a consumer's willingness to continue using a particular brand of a good or service
• Break-even price (HL)


  the price where average revenue (price) is equal to average total costs (AR(P)=TC); below this price, the firm will shut down in the long run
• Cap-and-trade system


  a market-based approach used to control pollution by giving firms economic incentives to reduce pollution emissions
• Capital


  financial capital refers to the financial resources available for use in a business; physical capital refers to man-made resources (like factories) used to produce goods; human capital refers to the abilities, knowledge, and creativity of human beings
• Cartel (HL)


  a formal agreement among firms on prices, output, or some other factor
• Ceteris paribus


  a Latin expression meaning "let all other things remain equal" used by economists to develop economic theories or models
• Collusive oligopoly (HL)


  where a few firms in an oligopoly agree to fix prices or output to avoid competition; together firms act like a monopoly
• Commodities


  (primary products) agricultural products or raw materials used to produce other goods
• Common access resources (common pool resources, common property resources)

  resources widely available for anyone to use without paying for them; similar to public goods, so they may be over-used.
• Complementary goods

  goods which are used together, such as DVD players and DVD discs.
• Concentration ratio (HL)


  a ratio that indicates the relative size of firms in relation to their industry as a whole; low concentration ratio indicates greater competition
• Constant returns to scale (HL)


  where a given percentage increase in the quantity of all factors of production results in an equal percentage change in output and thus no change in long run average costs
• Consumer


  a person who buys goods and services
• Consumer surplus


  the additional benefit / utility received by consumers by paying a price that is lower than they are willing to pay.
• Corporate social responsibility (CSR) (HL)


  where a firm attempts to produce responsibly/ethically towards the community and environment - an alternative goal of firms (as opposed to or in addition to profit maximization)
• Deadweight loss

  the costs to society created by market inefficiency
• Decreasing returns to scale (HL)

  where a given percentage increase in the quantity of all factors of production results in a smaller percentage increase in output and thus an increase in long run average costs (diseconomies of scale)
• Demand


  the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period
• Demand schedule


  a chart/table showing the quantity of a product demanded at each price; used to draw a demand curve
• Demerit goods


  are goods or services that are bad for people and have negative externalities for third parties; they are over-provided and over-consumed by the market (cigarettes and alcohol)
• Direct tax


  a tax that is taken directly from the income of individuals or firms
• Diseconomies of scale (HL)

  any increase in long-run average costs that resulting from a firm increasing its output
• Division of labour (HL)


  specialisation of people who perform specific tasks and roles; can result in increased productive efficiency
• Economic costs (HL)


  the total opportunity costs of production to a firm
• Economic goods


  a product or service that can command a price when sold.
• Economic problem


  needs and wants are unlimited, but resources are limited, so choices have to be made about what to produce, how to produce, and for whom to produce and each choice carries an opportunity cost