Dr McCormick 

IB Economics 
Master handout 

IB Economics Master Handout 

Syllabus, definitions, diagrams, past questions, mark schemes 
 
Section  SL teaching hours  HL teaching hours 

Microeconomics  35  95 

Macroeconomics  40  50 

International economics  25  45 

Development economics  30  30 

Internal assessment  20  20 

 
Exam paper  Duration  Content  SL weighting  HL weighting 

1  90 minutes   Essays. Section A: microeconomics; 1 Q from a choice of 2. (25 marks) Section B: macroeconomics; 1 Q from a choice of 2. (25 marks)  40%  30% 

2  90 minutes   Data response. Section A: international; 1 Q from a choice of 2. (20 marks) Section B: development; 1 Q from a choice of 2. (20 marks)  40%  30% 

3 (HL only)  60 minutes  HL extension paper; all sections of syllabus; 2 Qa from a choice of 3. (25 marks per Q)  0%  20% 

Internal assessment    Internally assessed by the teacher and externally moderated by the IB at the end of the course; students produce a portfolio of three commentaries, based  20%  20% 
on different sections of the syllabus and on published extracts from the news media. Maximum 750 words x 3 (45 marks) 

 
Assessment objective  Key command term  Explanation  Paper 1  Paper 2  Paper 3 (HL only)  IA 

AO1—knowledge & understanding   Define, Describe, List, Outline, State   These terms require students to learn and comprehend the meaning of  30%  35%  30%  20% 
information.  

AO2—application & analysis  Analyse, Apply, Comment, Distinguish, Explain,  These terms require students to use their knowledge to explain actual  30%  30%  30%  35% 
Suggest   situations, and to break down ideas into simpler parts and to see how 
the parts relate.  

AO3—synthesis & evaluation   Compare, Compare and contrast, Contrast, Discuss,  These terms require students to rearrange component ideas into a new  20%  25%  0%  25% 
Evaluate, Examine, Justify, To what extent   whole and make judgments based on evidence or a set of criteria.  

AO4—selection, use & application of a  Calculate, Construct, Derive, Determine, Draw,  These terms require students to demonstrate the selection and  20%  10%  40%  20% 
variety of appropriate skills & techniques  Identify, Label, Measure, Plot, Show that, Sketch, Solve   application of skills.  
 
   

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Dr McCormick 
IB Economics 
Master handout 

Topic  Subtopic  Content 

Micro     
Foundations  Economics as a social  Explain that economics is a social science. 
science  Outline the social scientific method. 
Explain the process of model building in economics. 
Explain that economists must use the ceteris paribus assumption when developing economic models. 
Distinguish between positive and normative economics. 
Examine the assumption of rational economic decision-making 
  Scarcity  Explain that scarcity exists because factors of production are finite and wants are infinite. 
Explain that economics studies the ways in which resources are allocated to meet needs and wants. 
Explain that the three basic economic questions that must be answered by any economic system are: “What to produce?”, “How to produce?” and “For whom to produce?” 
  Choice and opportunity cost  Explain that as a result of scarcity, choices have to be made. 
Explain that when an economic choice is made, an alternative is always foregone. 
Explain  that  a  production  possibilities  curve  (production  possibilities  frontier)  model  may  be  used  to  show  the  concepts  of  scarcity,  choice,  opportunity  cost  and  a situation of 
unemployed resources and inefficiency 
  Central themes  Explain  that  the  economics  course  will  focus  on  several  themes,  which  include:  the  extent  to  which  governments  should  intervene  in  the  allocation  of  resources;  the  threat  to 
sustainability  as  a  result  of  the  current  patterns  of  resource  allocation;  the  extent  to  which  the  goal  of  economic  efficiency  may  conflict  with  the  goal  of  equity;  the  distinction 
between economic growth and economic development. 
Competitive markets:  Nature of markets  Outline the meaning of the term market. 
demand and supply 
  Law of demand  Explain the negative causal relationship between price and quantity demanded. 
Describe the relationship between an individual consumer’s demand and market demand. 
  Demand curve  Explain that a demand curve represents the relationship between the price and the 
quantity demanded of a product, ceteris paribus. 
Draw a demand curve. 
  Non-price determinants of  Explain  how  factors including changes in income (in the cases of normal and inferior goods), preferences, prices of related goods (in the cases of substitutes and complements) and
demand  demographic changes may change demand. 
  Movements along and shifts  Distinguish between movements along the demand curve and shifts of the demand curve. 
of the demand curve  Draw diagrams to show the difference between movements along the demand curve and shifts of the demand curve. 
  Linear demand (HL only)  Explain a demand function (equation) of the form Qd = a – bP. 
Plot a demand curve from a linear function (eg. Qd = 60 – 5P). 
Identify the slope of the demand curve as the slope of the demand function Qd = a – bP, that is –b (the coefficient of P). 
Outline why, if the “a” term changes, there will be a shift of the demand curve. 
Outline how a change in “b” affects the steepness of the demand curve. 
  Law of supply  Explain the positive causal relationship between price and quantity supplied. 
Describe the relationship between an individual producer’s supply and market supply 
  Supply curve  Explain that a supply curve represents the relationship between the price and the quantity supplied of a product, ceteris paribus. 
Draw a supply curve. 
  Non-price determinants of  Explain  how  factors  including changes in costs of factors of production (land, labour, capital and entrepreneurship), technology, prices of related goods (joint/competitive supply), 
supply  expectations, indirect taxes and subsidies and the number of firms in the market can change supply. 
  Movements along and shifts  Distinguish between movements along the supply curve and shifts of the supply curve. 
of the supply curve  Construct diagrams to show the difference between movements along the supply curve and shifts of the supply curve. 
  Linear supply (HL only)  Explain a supply function (equation) of the form Qs = c + dP. 
Plot a supply curve from a linear function (eg, Qs = –30 + 20 P). 
Identify the slope of the supply curve as the slope of the supply function Qs = c + dP, that is d (the coefficient of P). 
Outline why, if the “c” term changes, there will be a shift of the supply curve. 
Outline how a change in “d” affects the steepness of the supply curve 

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Dr McCormick 
IB Economics 
Master handout 

  Equilibrium and changes to  Explain, using diagrams, how demand and supply interact to produce market equilibrium. 
equilibrium  Analyse, using diagrams and with reference to excess demand or excess supply, how changes in the determinants of demand and/or supply result in a new market equilibrium 
  Calculating and illustrating  Calculate the equilibrium price and equilibrium quantity from linear demand and supply functions. 
equilibrium using linear equations  Plot demand and supply curves from linear functions, and identify the equilibrium price and equilibrium quantity. 
(HL only)  State the quantity of excess demand or excess supply in the above diagrams. 
  Resource allocation  Explain why scarcity necessitates choices that answer the “What to produce?” question. 
Explain why choice results in an opportunity cost. 
Explain,  using  diagrams,  that  price  has  a  signalling  function  and  an  incentive  function,  which  result  in  a  reallocation  of  resources  when  prices  change  as  a  result  of a change in 
demand or supply conditions. 
  Consumer surplus  Explain the concept of consumer surplus. 
Identify consumer surplus on a demand and supply diagram 
  Producer surplus  Explain the concept of producer surplus. 
Identify producer surplus on a demand and supply diagram. 
  Allocative efficiency  Explain  that  the  best  allocation  of  resources  from  society’s  point  of  view is at competitive market equilibrium, where social (community) surplus (consumer surplus and producer 
surplus) is maximized (marginal benefit = marginal cost). 
Elasticity  Price elasticity of demand and Explain the concept of price elasticity of demand, understanding that it involves responsiveness of quantity demanded to a change in price, along a given demand curve. 
its determinants  Calculate PED using the following equation: PED = (% change in quantity demanded) / (% change in price) 
State that the PED value is treated as if it were positive although its mathematical value is usually negative. 
Explain, using diagrams and PED values, the concepts of price elastic demand, price inelastic demand, unit elastic demand, perfectly elastic demand and perfectly inelastic demand. 
Explain the determinants of PED, including the number and closeness of substitutes, the degree of necessity, time and the proportion of income spent on the good. 
Calculate PED between two designated points on a demand curve using the PED equation above. 
Explain why PED varies along a straight line demand curve and is not represented by the slope of the demand curve. 
  Applications of price elasticity Examine the role of PED for firms in making decisions regarding price changes and their effect on total revenue. 
of demand  Explain why the PED for many primary commodities is relatively low and the PED for manufactured products is relatively high. 
Examine the significance of PED for government in relation to indirect taxes. 
  Cross price elasticity of  Outline  the  concept  of  cross  price  elasticity  of  demand, understanding that it involves responsiveness of demand for one good (and hence a shifting demand curve) to a change in 
demand and its determinants  the price of another good. 
Calculate XED using the following equation: XED = (% change in quantity demanded of good x) / (% change in price of good y) 
Show that substitute goods have a positive value of XED and complementary goods have a negative value of XED. 
Explain that the (absolute) value of XED depends on the closeness of the relationship between two goods. 
  Applications of cross price  Examine the implications of XED for businesses if prices of substitutes or complements change. 
elasticity of demand 
  Income elasticity of demand  Outline the concept of income elasticity of demand, understanding that it involves responsiveness of demand (and hence a shifting demand curve) to a change in income. 
and its determinants  Calculate YED using the following equation: YED = (% change in quantity demanded) / (% change in income). 
Show that normal goods have a positive value of YED and inferior goods have a negative value of YED. 
Distinguish, with reference to YED, between necessity (income inelastic) goods and luxury (income elastic) goods. 
  Applications of income  Examine  the  implications for producers and for the economy of a relatively low YED for primary products, a relatively higher YED for manufactured products and an even higher 
elasticity of demand  YED for services. 
  Price elasticity of supply and  Explain the concept of price elasticity of supply, understanding that it involves responsiveness of quantity supplied to a change in price along a given supply curve. 
its determinants  Calculate PES using the following equation: PES = (% change in quantity supplied) / (% change in price) 
Explain, using diagrams and PES values, the concepts of elastic supply, inelastic supply, unit elastic supply, perfectly elastic supply and perfectly inelastic supply. 
Explain the determinants of PES, including time, mobility of factors of production, unused capacity and ability to store stocks. 
  Applications of price elasticity Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high. 
of supply 
Government  Specific (fixed amount) taxes  Explain why governments impose indirect (excise) taxes. 
intervention  and ad valorem (percentage)  Distinguish between specific and ad valorem taxes. 
Draw diagrams to show specific and ad valorem taxes, and analyse their impacts on market outcomes. 

3 
Dr McCormick 
IB Economics 
Master handout 

taxes and their impact on  Discuss the consequences of imposing an indirect tax on the stakeholders in a market, including consumers, producers and the government. 
markets 
  Tax incidence and PED and PES Explain, using diagrams, how the incidence of indirect taxes on consumers and firms differs, depending on the price elasticity of demand and on the price elasticity of supply. 
(HL only)  Plot  demand  and  supply  curves  for  a  product  from  linear  functions  and  then  illustrate  and/or  calculate  the  effects  of  the  imposition  of  a  specific  tax  on  the  market  (on  price,  quantity, consumer expenditure, 
producer revenue, government revenue, consumer surplus and producer surplus). 
  Subsidies: impact on markets  Explain why governments provide subsidies, and describe examples of subsidies. 
Draw a diagram to show a subsidy, and analyse the impacts of a subsidy on market outcomes. 
Discuss the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government. 
  Subsidies (HL only)  Plot  demand  and  supply  curves  for  a  product  from  linear  functions  and  then  illustrate  and/or  calculate  the effects of the provision of a subsidy on the market (on price, quantity, consumer expenditure, producer 
revenue, government expenditure, consumer surplus and producer surplus). 
  Price ceilings (maximum  Explain why governments impose price ceilings, and describe examples of price ceilings, including food price controls and rent controls. 
prices): rationale,  Draw a diagram to show a price ceiling, and analyse the impacts of a price ceiling on market outcomes. 
consequences and examples  Examine  the  possible  consequences  of  a  price  ceiling,  including  shortages,  inefficient  resource  allocation,  welfare  impacts,  underground  parallel  markets and non-price rationing 
mechanisms. 
Discuss the consequences of imposing a price ceiling on the stakeholders in a market, including consumers, producers and the government. 
  Price ceilings (HL only)  Calculate possible effects from the price ceiling diagram, including the resulting shortage and the change in consumer expenditure (which is equal to the change in firm revenue). 
  Price floors (minimum prices):Explain why governments impose price floors, and describe examples of price floors, including price support for agricultural products and minimum wages. 
rationale, consequences and  Draw a diagram of a price floor, and analyse the impacts of a price floor on market outcomes. 
examples  Examine the possible consequences of a price floor, including surpluses and government measures to dispose of the surpluses, inefficient resource allocation and welfare impacts. 
Discuss the consequences of imposing a price floor on the stakeholders in a market, including consumers, producers and the government. 
  Price floors (HL only)  Calculate  possible  effects  from  the  price  floor  diagram,  including  the  resulting  surplus,  the  change  in  consumer  expenditure,  the  change  in  producer  revenue,  and  government 
expenditure to purchase the surplus. 
Market failure  Market failure as a failure to  Analyse  the  concept  of  market  failure  as  a  failure  of  the  market  to  achieve  allocative  efficiency,  resulting  in  an  over  allocation  of  resources  (overprovision  of  a  good)  or  an 
allocate resources efficiently  under-allocation of resources (under-provision of a good). 
  The meaning of externalities  Describe the concepts of marginal private benefits (MPB), marginal social benefits (MSB), marginal private costs (MPC) and marginal social costs (MSC). 
Describe the meaning of externalities as the failure of the market to achieve a social optimum where MSB = MSC 
  Negative externalities of  Explain,  using  diagrams  and  examples,  the  concepts  of  negative externalities of production and consumption, and the welfare loss associated with the production or consumption 
production and consumption  of a good or service. 
Explain  that  demerit  goods  are  goods  whose  consumption  creates  external  costs.  Evaluate,  using  diagrams,  the use of policy responses, including market-based policies (taxation 
and tradable permits), and government regulations, to the problem of negative externalities of production and consumption. 
  Positive externalities of  Explain,  using  diagrams  and  examples,  the  concepts  of  positive  externalities  of production and consumption, and the welfare loss associated with the production or consumption 
production and consumption  of a good or service. 
Explain that merit goods are goods whose consumption creates external benefits. 
Evaluate, using diagrams, the use of government responses, including subsidies, legislation, advertising to influence behaviour, and direct provision of goods and services. 
  Lack of public goods  Using  the  concepts  of  rivalry  and  excludability,  and  providing  examples,  distinguish  between  public  goods  (non-rivalrous  and  non  excludable)  and  private  goods  (rivalrous  and 
excludable). 
Explain, with reference to the free rider problem, how the lack of public goods indicates market failure. 
Discuss the implications of the direct provision of public goods by government. 
  Common access resources  Describe, using examples, common access resources. 
and the threat to sustainability Describe sustainability. 
Explain  that  the  lack  of  a  pricing  mechanism  for  common  access  resources  means that these goods may be overused/depleted/degraded as a result of activities of producers and 
consumers who do not pay for the resources that they use, and that this poses a threat to sustainability. 
Explain, using negative externalities diagrams, that economic activity requiring the use of fossil fuels to satisfy demand poses a threat to sustainability. 
Explain  that  the  existence  of  poverty  in  economically  less  developed countries creates negative externalities through over-exploitation of land for agriculture, and that this poses a 
threat to sustainability. 
Evaluate, using diagrams, possible government responses to threats to sustainability, including legislation, carbon taxes, cap and trade schemes, and funding for clean technologies. 

4 
Dr McCormick 
IB Economics 
Master handout 

Explain,  using  examples,  that  government  responses  to  threats  to  sustainability  are  limited  by  the  global  nature  of  the  problems  and  the  lack  of  ownership  of  common  access 
resources, and that effective responses require international cooperation. 
  Asymmetric information  Explain, using examples, that market failure may occur when one party in an economic transaction (either the buyer or the seller) possesses more information than the other party. 
Evaluate possible government responses, including legislation, regulation and provision of information. 
  Abuse of monopoly power  Explain how monopoly power can create a welfare loss and is therefore a type of market failure. 
Discuss possible government responses, including legislation, regulation, nationalization and trade liberalization. 
Theory of the firm and  Production in the short run: the law Distinguish between the short run and long run in the context of production. 
market structures (HL  of diminishing returns  Define total product, average product and marginal product, and construct diagrams to show their relationship. 
only)  Explain the law of diminishing returns. 
Calculate total, average and marginal product from a set of data and/or diagrams 
  Costs of production: economic costs  Explain the meaning of economic costs as the opportunity cost of all resources employed by the firm (including entrepreneurship). 
Distinguish between explicit costs and implicit costs as the two components of economic costs. 
  Costs of production in the short run Explain the distinction between the short run and the long run, with reference to fixed factors and variable factors. 
Distinguish between total costs, marginal costs and average costs. 
Draw diagrams illustrating the relationship between marginal costs and average costs, and explain the connection with production in the short run. Explain the relationship 
between the product curves (average product and marginal product) and the cost curves (average variable cost and marginal cost), with reference to the law of diminishing returns. 
Calculate total fixed costs, total variable costs, total costs, average fixed costs, average variable costs, average total costs and marginal costs from a set of data and/or diagrams. 
  Production in the long run: returns  Distinguish between increasing returns to scale, decreasing returns to scale and constant returns to scale. 
to scale 
  Costs of production in the long run  Outline the relationship between short-run average costs and long-run average costs. 
Explain, using a diagram, the reason for the shape of the long-run average total cost curve. 
Describe factors giving rise to economies of scale, including specialization, efficiency, marketing and indivisibilities. 
Describe factors giving rise to diseconomies of scale, including problems of coordination and communication. 
  Total revenue, average revenue and  Distinguish between total revenue, average revenue and marginal revenue. 
marginal revenue  Draw diagrams illustrating the relationship between total revenue, average revenue and marginal revenue. 
Calculate total revenue, average revenue and marginal revenue from a set of data and/or diagrams. 
  Economic profit (sometimes known  Describe economic profit (abnormal profit) as the case where total revenue exceeds economic cost. 
as abnormal profit) and normal  Describe  normal profit (zero economic profit) as the case where total revenue is equal to total economic costs or the situation in which the amount of revenue earned is just sufficient to keep the firm in its current line 
profit (zero economic profit  of business. 
occurring at the breakeven point)  Explain that economic profit (abnormal profit) is profit over and above normal profit (zero economic profit), and that the firm earns normal profit when economic profit (abnormal profit) is zero. 
Explain why a firm will continue to operate even when it earns zero economic profit (abnormal profit). 
Explain the meaning of loss as negative economic profit arising when total revenue is less than total cost. 
Calculate different profit levels from a set of data and/or diagrams. 
  Profit maximization  Explain the goal of profit maximization where the difference between total revenue and total cost is maximized or where marginal revenue equals marginal cost. 
  Alternative goals of firms  Describe alternative goals of firms, including revenue maximization, growth maximization, satisficing and corporate social responsibility. 
  Perfect competition: assumptions  Describe, using examples, the assumed characteristics of perfect competition: a large number of firms; a homogeneous product; freedom of entry and exit; perfect information; perfect resource mobility. 
  Revenue curves  Explain, using a diagram, the shape of the perfectly competitive firm’s average revenue and marginal revenue curves, indicating that the assumptions of perfect competition imply that each firm is a price taker. 
Explain, using a diagram, that the perfectly competitive firm’s average revenue and marginal revenue curves are derived from market equilibrium for the industry 
  Profit maximization in the short  Explain,  using  diagrams,  that  it  is  possible  for  a perfectly competitive firm to make economic profit (abnormal profit), normal profit (zero economic profit) or negative economic profit in the short run based on the 
run  marginal cost and marginal revenue profit maximization rule. 
  Profit maximization in the long  Explain, using a diagram, why, in the long run, a perfectly competitive firm will make normal profit (zero economic profit). 
run  Explain, using a diagram, how a perfectly competitive market will move from short run equilibrium to long-run equilibrium 
  Shut-down price and break-even  Distinguish between the short run shutdown price and the break-even price. 
price  Explain, using a diagram, when a loss-making firm would shut down in the short run. 
Explain, using a diagram, when a loss-making firm would shut down and exit the market in the long run. 
Calculate the short run shutdown price and the breakeven price from a set of data 
  Efficiency  Explain the meaning of the term allocative efficiency. 

5 
Dr McCormick 
IB Economics 
Master handout 

Explain that the condition for allocative efficiency is P = MC (or, with externalities, MSB = MSC). 
Explain, using a diagram, why a perfectly competitive market leads to allocative efficiency in both the short run and the long run. 
Explain the meaning of the term productive/technical efficiency. 
Explain that the condition for productive efficiency is that production takes place at minimum average total cost. 
Explain, using a diagram, why a perfectly competitive firm will be productively efficient in the long run, though not necessarily in the short run. 
  Monopoly: assumptions  Describe, using examples, the assumed characteristics of a monopoly: a single or dominant firm in the market; no close substitutes; significant barriers to entry. 
  Barriers to entry  Describe, using examples, barriers to entry, including economies of scale, branding and legal barriers. 
  Revenue curves  Explain that the average revenue curve for a monopolist is the market demand curve, which will be downward sloping. 
Explain, using a diagram, the relationship between demand, average revenue and marginal revenue in a monopoly. 
Explain why a monopolist will never choose to operate on the inelastic portion of its average revenue curve. 
  Profit maximization  Explain, using a diagram, the short- and long-run equilibrium output and pricing decision of a profit maximizing (loss minimizing) monopolist, identifying the firm’s economic profit (abnormal profit), or losses. 
Explain the role of barriers to entry in permitting the firm to earn economic profit (abnormal profit). 
  Revenue maximization  Explain, using a diagram, the output and pricing decision of a revenue maximizing monopoly firm. 
Compare and contrast, using a diagram, the equilibrium positions of a profit maximizing monopoly firm and a revenue maximizing monopoly firm. 
Calculate from a set of data and/or diagrams the revenue maximizing level of output. 
  Natural monopoly  With reference to economies of scale, and using examples, explain the meaning of the term “natural monopoly”. 
Draw a diagram illustrating a natural monopoly 
  Monopoly and efficiency  Explain, using diagrams, why the profit maximizing choices of a monopoly firm lead to allocative inefficiency (welfare loss) and productive inefficiency. 
Explain  why,  despite  inefficiencies,  a  monopoly  may  be considered desirable for a variety of reasons, including the ability to finance research and development (R&D) from economic profits, the need to innovate to 
maintain economic profit (abnormal profit), and the possibility of economies of scale 
  Policies to regulate monopoly power Evaluate the role of legislation and regulation in reducing monopoly power. 
  The advantages and disadvantages  Draw  diagrams  and use them to compare and contrast a monopoly market with a perfectly competitive market, with reference to factors including efficiency, price and output, research and development (R&D) and 
of monopoly compared with perfect  economies of scale. 
competition 
  Monopolistic competition:  Describe, using examples, the assumed characteristics of a monopolistic competition: a large number of firms; differentiated products; absence of barriers to entry and exit. 
assumptions 
  Revenue curves  Explain that product differentiation leads to a small degree of monopoly power and therefore to a negatively sloping demand curve for the product 
  Profit maximization in the short  Explain, using a diagram, the short-run equilibrium output and pricing decisions of a profit maximizing (loss minimizing) firm in monopolistic competition, identifying the firm’s economic profit (or loss). 
run 
  Profit maximization in the long  Explain, using diagrams, why in the long run a firm in monopolistic competition will make normal profit. 
run 
  Non-price competition  Distinguish between price competition and non-price competition. 
Describe examples of nonprice competition, including advertising, packaging, product development and quality of service. 
  Monopolistic competition and  Explain, using a diagram, why neither allocative efficiency nor productive efficiency are achieved by monopolistically competitive firms. 
efficiency 
  Monopolistic competition compared  Compare  and  contrast,  using  diagrams,  monopolistic  competition  with  perfect  competition,  and  monopolistic  competition  with  monopoly,  with  reference  to  factors  including  short  run,  long  run,  market  power, 
with perfect competition and  allocative and productive efficiency, number of producers, economies of scale, ease of entry and exit, size of firms and product differentiation. 
monopoly 
  Oligopoly: assumptions  Describe,  using  examples,  the  assumed  characteristics  of  an  oligopoly:  the  dominance  of  the  industry  by  a  small  number  of  firms;  the  importance of interdependence; differentiated or homogeneous products; high 
barriers to entry. 
Explain why interdependence is responsible for the dilemma faced by oligopolistic firms— whether to compete or to collude. 
Explain how a concentration ratio may be used to identify an oligopoly 
  Game theory  Explain how game theory (the simple prisoner’s dilemma) can illustrate strategic interdependence and the options available to oligopolies. 
  Open/formal collusion  Explain the term “collusion”, give examples, and state that it is usually (in most countries) illegal. 
Explain the term “cartel”. 
Explain that the primary goal of a cartel is to limit competition between member firms and to maximize joint profits as if the firms were collectively a monopoly. 
Explain the incentive of cartel members to cheat. 

6 
Dr McCormick 
IB Economics 
Master handout 

Analyse the conditions that make cartel structures difficult to maintain. 

  Tacit/informal collusion  Describe the term “tacit collusion”, including reference to price leadership by a dominant firm. 
  Non-collusive oligopoly  Explain that the behaviour of firms in a non-collusive oligopoly is strategic in order to take account of possible actions by rivals. 
Explain, using a diagram, the existence of price rigidities, with reference to the kinked demand curve. 
Explain why non-price competition is common in oligopolistic markets, with reference to the risk of price wars. 
Describe, using examples, types of non-price competition. 
  Necessary conditions for the practice Describe  price  discrimination  as  the  practice  of  charging  different  prices  to  different  consumer  groups  for  the  same  product,  where  the  price  difference  is  not  justified  by  differences  in  cost.  Explain  that  price 
  of price discrimination  discrimination  may  only  take  place  if  all  of  the  following  conditions  exist:  the  firm  must  possess  some  degree  of market power; there must be groups of consumers with differing price elasticities of demand for the 
  product; the firm must be able to separate groups to ensure that no resale of the product occurs. 
  Draw a diagram to illustrate how a firm maximizes profit in third degree price discrimination, explaining why the higher price is set in the market with the relatively more inelastic demand. 
 
Macro     
Level of overall  The circular flow of income  Describe, using a diagram, the circular flow of income between households and firms in a closed economy with no government. 
economic activity  model  Identify the four factors of production and their respective payments (rent, wages, interest and profit) and explain that these constitute the income flow in the model. 
Outline that the income flow is numerically equivalent to the expenditure flow and the value of output flow. 
Describe,  using  a  diagram,  the  circular  flow  of  income  in  an  open  economy  with government and financial markets, referring to leakages/ withdrawals (savings, taxes and import 
expenditure) and injections (investment, government expenditure and export revenue). 
Explain how the size of the circular flow will change depending on the relative size of injections and leakages. 
  Measures of economic  Distinguish between GDP and GNP/GNI as measures of economic activity. 
activity: gross domestic  Distinguish between the nominal value of GDP and GNP/GNI and the real value of GDP and GNP/GNI. 
product (GDP), and gross  Distinguish between total GDP and GNP/GNI and per capita GDP and GNP/GNI. 
national product (GNP) or  Examine the output approach, the income approach and the expenditure approach when measuring national income. 
gross national income (GNI)  Evaluate  the  use  of  national  income  statistics, including their use for making comparisons over time, their use for making comparisons between countries and their use for making 
conclusions about standards of living. 
Explain the meaning and significance of “green GDP”, a measure of GDP that accounts for environmental destruction. 
  GDP calculations (HL only)  Calculate nominal GDP from sets of national income data, using the expenditure approach. 
Calculate GNP/GNI from data 
Calculate real GDP, using a price deflator. 
  The business cycle: short-term Explain, using a business cycle diagram, that economies typically tend to go through a cyclical pattern characterized by the phases of the business cycle. 
fluctuations and long-term  Explain the long-term growth trend in the business cycle diagram as the potential output of the economy. 
trend  Distinguish between a decrease in GDP and a decrease in GDP growth. 
Aggregate demand  The AD curve  Distinguish between the microeconomic concept of demand for a product and the macroeconomic concept of aggregate demand. 
and aggregate supply  Construct an aggregate demand curve. 
Explain why the AD curve has a negative slope. 
  The components of AD  Describe consumption, investment, government spending and net exports as the components of aggregate demand 
  The determinants of AD or  Explain  how  the  AD  curve  can  be  shifted  by  changes  in consumption due to factors including changes in consumer confidence, interest rates, wealth, personal income taxes (and 
causes of shifts in the AD  hence disposable income) and level of household indebtedness. 
curve  Explain  how  the  AD  curve  can  be  shifted  by  changes  in  investment  due  to  factors  including  interest  rates,  business  confidence,  technology,  business  taxes  and  the  level  of 
corporate indebtedness. 
Explain how the AD curve can be shifted by changes in government spending due to factors including political and economic priorities. 
Explain  how  the  AD  curve  can  be  shifted  by  changes  in  net  exports  due  to  factors  including  the  income  of  trading  partners,  exchange  rates  and  changes  in  the  level  of 
protectionism. 
  The meaning of aggregate  Describe the term aggregate supply. 
supply  Explain, using a diagram, why the short-run aggregate supply curve (SRAS curve) is upward sloping. 
Explain,  using  a  diagram,  how  the  AS  curve  in  the  short  run  (SRAS)  can  shift  due  to  factors  including  changes  in  resource  prices,  changes  in  business  taxes  and  subsidies  and 
supply shocks. 

7 
Dr McCormick 
IB Economics 
Master handout 

  Alternative views of aggregate Explain, using a diagram, that the monetarist/new classical model of the long run aggregate supply curve (LRAS) is vertical at the level of potential output (full employment output) 

supply  because aggregate supply in the long run is independent of the price level. 
Explain,  using  a  diagram,  that  the  Keynesian  model  of  the  aggregate  supply  curve  has  three sections because of “wage/price” downward inflexibility and different levels of spare 
capacity in the economy. 
  Shifting the aggregate supply  Explain, using the two models above, how factors leading to changes in the quantity and/or quality of factors of production (including improvements in efficiency, new technology, 
curve over the long term  reductions in unemployment, and institutional changes) can shift the aggregate supply curve over the long term. 
  Short-run equilibrium  Explain, using a diagram, the determination of short-run equilibrium, using the SRAS curve. 
Examine, using diagrams, the impacts of changes in short run equilibrium. 
  Equilibrium in the  Explain, using a diagram, the determination of long-run equilibrium, indicating that long-run equilibrium occurs at the full employment level of output. 
monetarist/new classical  Explain  why,  in the monetarist/new classical approach, while there may be short-term fluctuations in output, the economy will always return to the full employment level of output 
model  in the long run. 
Examine, using diagrams, the impacts of changes in the long-run equilibrium. 
  Equilibrium in the Keynesian  Explain, using the Keynesian AD/AS diagram, that the economy may be in equilibrium at any level of real output where AD intersects AS. 
model  Explain, using a diagram, that if the economy is in equilibrium at a level of real output below the full employment level of output, then there is a deflationary (recessionary) gap. 
Discuss why, in contrast to the monetarist/new classical model, the economy can remain stuck in a deflationary (recessionary) gap in the Keynesian model. 
Explain, using a diagram, that if AD increases in the vertical section of the AS curve, then there is an inflationary gap. 
Discuss  why,  in  contrast  to  the  monetarist/new  classical  model,  increases  in  aggregate  demand  in  the  Keynesian  AD/AS  model  need  not  be inflationary, unless the economy is 
operating close to, or at, the level of full employment. 
  The nature of the Keynesian  Explain, with reference to the concepts of leakages (withdrawals) and injections, the nature and importance of the Keynesian multiplier. 
multiplier  Calculate the multiplier using either of the following formulae. 
1/(1− MPC) or 1/(MPS MPT+MPM) 
Use  the  multiplier  to  calculate  the  effect  on  GDP  of  a  change  in  an  injection  in  investment,  government  spending  or  exports. t Draw a Keynesian AD/AS diagram to show the 
impact of the multiplier. 
Macroeconomic  The meaning of  Define the term unemployment. 
objectives  unemployment  Explain how the unemployment rate is calculated. 
Explain  the  difficulties  in  measuring  unemployment,  including  the  existence  of  hidden  unemployment,  the  existence  of  underemployment,  and  the  fact  that  it is an average and 
therefore ignores regional, ethnic, age and gender disparities. 
  Unemployment (HL only)  Calculate the unemployment rate from a set of data. 
  Consequences of  Discuss  possible  economic  consequences of unemployment, including a loss of GDP, loss of tax revenue, increased cost of unemployment benefits, loss of income for individuals, 
unemployment  and greater disparities in the distribution of income. 
Discuss  possible  personal  and  social  consequences  of  unemployment,  including  increased  crime  rates,  increased  stress  levels,  increased  indebtedness,  homelessness  and  family 
breakdown. 
  Types and causes of  Describe, using examples, the meaning of frictional, structural, seasonal and cyclical (demand-deficient) unemployment. 
unemployment  Distinguish between the causes of frictional, structural, seasonal and cyclical (demand-deficient) unemployment. Explain, using a diagram, that cyclical unemployment is caused by a 
fall in aggregate demand. 
Explain,  using  a  diagram,  that  structural  unemployment  is  caused  by  changes  in  the  demand  for  particular  labour  skills,  changes  in  the  geographical  location  of  industries,  and 
labour market rigidities. 
Evaluate government policies to deal with the different types of unemployment 
  The meaning of inflation,  Distinguish between inflation, disinflation and deflation. 
disinflation and deflation  Explain  that  inflation  and  deflation  are  typically  measured  by  calculating  a  consumer  price  index  (CPI),  which  measures  the  change  in  prices  of  a  basket  of  goods  and  services 
consumed by the average household. 
Explain that different income earners may experience a different rate of inflation when their pattern of consumption is not accurately reflected by the CPI. 
Explain that inflation figures may not accurately reflect changes in consumption patterns and the quality of the products purchased. 
Explain that economists measure a core/underlying rate of inflation to eliminate the effect of sudden swings in the prices of food and oil, for example. 
Explain that a producer price index measuring changes in the prices of factors of production may be useful in predicting future inflation. 
  Inflation (HL only)  Construct a weighted price index, using a set of data provided. 
Calculate the inflation rate from a set of data. 

8 
Dr McCormick 
IB Economics 
Master handout 

  Consequences of inflation  Discuss the possible consequences of a high inflation rate, including greater uncertainty, redistributive effects, less saving, and the damage to export competitiveness. 
  Consequences of deflation  Discuss the possible consequences of deflation, including high levels of cyclical unemployment and bankruptcies. 
  Types and causes of inflation  Explain, using a diagram, that demand-pull inflation is caused by changes in the determinants of AD, resulting in an increase in AD. 
Explain, using a diagram, that cost-push inflation is caused by an increase in the costs of factors of production, resulting in a decrease in SRAS. 
Evaluate government policies to deal with the different types of inflation. 
  Possible relationships between  Discuss, using a short-run Phillips curve diagram, the view that there is a possible trade-off between the unemployment rate and the inflation rate in the short run. 
unemployment and inflation (HL  Explain,  using  a  diagram,  that  the  short-run Phillips curve may shift outwards, resulting in stagflation (caused by a decrease in SRAS due to factors including supply shocks). Discuss, using a diagram, the view 
only)  that there is a long run Phillips curve that is vertical at the natural rate of unemployment and therefore there is no trade-off between the unemployment rate and the inflation rate in the long run. 
Explain that the natural rate of unemployment is the rate of unemployment that exists when the economy is producing at the full employment level of output. 
  The meaning of economic  Define economic growth as an increase in real GDP. 
growth 
  Economic growth (HL only)  Calculate the rate of economic growth from a set of data. 
  Causes of economic growth  Describe,  using  a  production  possibilities  curve  (PPC)  diagram,  economic  growth  as  an  increase  in  actual  output  caused  by  factors  including  a  reduction  in  unemployment and 
increases in productive efficiency, leading to a movement of a point inside the PPC to a point closer to the PPC. 
Describe,  using  a  PPC  diagram,  economic  growth as an increase in production possibilities caused by factors including increases in the quantity and quality of resources, leading to 
outward PPC shifts. 
Describe,  using  an  LRAS  diagram,  economic  growth  as  an  increase  in  potential  output  caused  by  factors  including  increases in the quantity and quality of resources, leading to a 
rightward shift of the LRAS curve. 
Explain the importance of investment for economic growth, referring to investment in physical capital, human capital and natural capital. 
Explain the importance of improved productivity for economic growth. 
  Consequences of economic  Discuss  the  possible  consequences  of  economic  growth,  including  the  possible  impacts  on  living  standards,  unemployment,  inflation,  the  distribution  of  income,  the  current 
growth  account of the balance of payments, and sustainability. 
  The meaning of equity in the  Explain the difference between equity in the distribution of income and equality in the distribution of income. 
distribution of income  Explain that due to unequal ownership of factors of production, the market system may not result in an equitable distribution of income. 
  Indicators of income  Analyse data on relative income shares of given percentages of the population, including deciles and quintiles. 
equality/inequality  Draw a Lorenz curve and explain its significance. 
Explain how the Gini coefficient is derived and interpreted. 
  Poverty  Distinguish between absolute poverty and relative poverty. 
Explain possible causes of poverty, including low incomes, unemployment and lack of human capital. 
Explain possible consequences of poverty, including low living standards, and lack of access to health care and education. 
  The role of taxation in  Distinguish between direct and indirect taxes, providing examples of each, and explain that direct taxes may be used as a mechanism to redistribute income. 
promoting equity  Distinguish between progressive, regressive and proportional taxation, providing examples of each. 
  Taxation (HL only)  Calculate the marginal rate of tax and the average rate of tax from a set of data. 
  Other measures to promote  Explain  that  governments  undertake  expenditures  to  provide  directly,  or  to  subsidize,  a  variety  of  socially  desirable  goods and services (including health care services, education, 
equity  and infrastructure that includes sanitation and clean water supplies), thereby making them available to those on low incomes. 
Explain the term transfer payments, and provide examples, including old age pensions, unemployment benefits and child allowances. 
  The relationship between  Evaluate  government  policies  to  promote  equity  (taxation,  government  expenditure  and  transfer  payments)  in  terms of their potential positive or negative effects on efficiency in 
equity and efficiency  the allocation of resources. 
Fiscal policy  Sources of government  Explain  that  the  government  earns  revenue  primarily  from  taxes  (direct  and  indirect),  as  well  as  from  the  sale  of  goods  and  services  and  the  sale  of  state-owned  (government 
revenue  owned) enterprises. 
  Types of government  Explain that government spending can be classified into current expenditures, capital expenditures and transfer payments, providing examples of each. 
expenditures 
  The budget outcome  Distinguish between a budget deficit, a budget surplus and a balanced budget. 
Explain the relationship between budget deficits/ surpluses and the public (government) debt 
  Fiscal policy and short-term  Explain how changes in the level of government expenditure and/or taxes can influence the level of aggregate demand in an economy. 
demand management  Describe the mechanism through which expansionary fiscal policy can help an economy close a deflationary (recessionary) gap. 
Construct a diagram to show the potential effects of expansionary fiscal policy, outlining the importance of the shape of the aggregate supply curve. 

9 
Dr McCormick 
IB Economics 
Master handout 

Describe the mechanism through which contractionary fiscal policy can help an economy close an inflationary gap. 
Construct a diagram to show the potential effects of contractionary fiscal policy, outlining the importance of the shape of the aggregate supply curve. 
  The impact of automatic  Explain  how  factors  including  the  progressive  tax  system  and  unemployment  benefits,  which  are  influenced  by  the  level of economic activity and national income, automatically 
stabilizers  help stabilize short-term fluctuations. 
  Fiscal policy and its impact on Explain  that  fiscal  policy  can  be  used  to  promote  long-term  economic  growth (increases in potential output) indirectly by creating an economic environment that is favourable to 
potential output  private investment, and directly through government spending on physical capital goods and human capital formation, as well as provision of incentives for firms to invest. 
  Evaluation of fiscal policy  Evaluate  the  effectiveness  of  fiscal  policy  through  consideration  of  factors  including  the  ability  to  target  sectors  of  the  economy,  the  direct  impact  on  aggregate  demand,  the 
effectiveness of promoting economic activity in a recession, time lags, political constraints, crowding out, and the inability to deal with supply side causes of instability 
Monetary policy  Monetary policy and  Explain how changes in interest rates can influence the level of aggregate demand in an economy. 
short-term demand  Describe the mechanism through which easy (expansionary) monetary policy can help an economy close a deflationary (recessionary) gap. 
management  Construct a diagram to show the potential effects of easy (expansionary) monetary policy, outlining the importance of the shape of the aggregate supply curve. 
Describe the mechanism through which tight (contractionary) monetary policy can help an economy close an inflationary gap. 
Construct a diagram to show the potential effects of tight (contractionary) monetary policy, outlining the importance of the shape of the aggregate supply curve. 
  Monetary policy and inflation  Explain  that  central  banks  of  certain countries, rather than focusing on the maintenance of both full employment and a low rate of inflation, are guided in their monetary policy by 
targeting  the objective to achieve an explicit or implicit inflation rate target. 
  Evaluation of monetary policy Evaluate  the  effectiveness  of  monetary  policy  through  consideration of factors including the independence of the central bank, the ability to adjust interest rates incrementally, the 
ability  to  implement  changes  in  interest  rates  relatively  quickly,  time  lags,  limited  effectiveness  in  increasing  aggregate  demand  if  the  economy  is  in  deep  recession  and  conflict 
among government economic objectives. 
Supply-side policies  Supply-side policies and the  Explain  that  supply-side  policies  aim  at  positively  affecting  the  production  side  of  an  economy  by  improving  the  institutional  framework and the capacity to produce (that is, by 
economy  changing the quantity and/or quality of factors of production). 
State that supply-side policies may be market-based or interventionist, and that in either case they aim to shift the LRAS curve to the right, achieving growth in potential output. 
  Interventionist supply-side  Explain  how  investment  in  education  and  training  will  raise  the  levels  of  human  capital  and  have  a  short-term  impact  on  aggregate  demand,  but  more importantly will increase 
policies  LRAS. 
    Explain  how  investment  in  education  and  training  will  raise  the  levels  of  human  capital  and  have  a  short-term  impact  on  aggregate  demand,  but  more importantly will increase 
LRAS. 
    Explain how increased and improved infrastructure will have a short-term impact on aggregate demand, but more importantly will increase LRAS. 
    Explain  that  targeting  specific  industries  through  policies  including  tax  cuts,  tax  allowances  and  subsidized  lending  promotes  growth in key areas of the economy and will have a 
short-term impact on aggregate demand but, more importantly, will increase LRAS. 
  Market-based supply-side  Explain how factors including deregulation, privatization, trade liberalization and anti monopoly regulation are used to encourage competition. 
policies 
    Explain  how  factors  including  reducing  the  power  of  labour  unions,  reducing  unemployment  benefits  and  abolishing  minimum  wages  are  used to make the labour market more 
flexible (more responsive to supply and demand). 
    Explain  how  factors  including  personal  income  tax  cuts  are  used  to  increase  the  incentive  to  work,  and  how  cuts  in  business  tax  and  capital  gains  tax  are  used  to  increase  the 
incentive to invest. 
  Evaluation of supply-side  Evaluate  the  effectiveness  of  supply-side  policies  through  consideration  of  factors  including  time lags, the ability to create employment, the ability to reduce inflationary pressure, 
  policies  the impact on economic growth, the impact on the government budget, the effect on equity, and the effect on the environment. 
 
 
 
 
 
 
 
 
 
 
 

10 
Dr McCormick 
IB Economics 
Master handout 

International     
International trade  The benefits of trade  Explain  that  gains  from  trade  include  lower  prices  for  consumers,  greater  choice  for  consumers, the ability of producers to benefit from economies of scale, the ability to acquire 
needed resources, a more efficient allocation of resources, increased competition, and a source of foreign exchange. 
  Absolute and comparative  Explain the theory of absolute advantage. 
advantage  Explain, using a diagram, the gains from trade arising from a country’s absolute advantage in the production of a good. 
Explain the theory of comparative advantage. 
Describe the sources of comparative advantage, including the differences between countries in factor endowments and the levels of technology. 
Draw a diagram to show comparative advantage. 
Calculate opportunity costs from a set of data in order to identify comparative advantage. 
Draw a diagram to illustrate comparative advantage from a set of data. 
Discuss  the  real-world  relevance  and  limitations  of  the  theory of comparative advantage, considering factors including the assumptions on which it rests, and the costs and benefits of specialization (a full discussion 
must take into account arguments in favour and against free trade and protection—see below). 
  The World Trade  Describe the objectives and functions of the WTO. 
Organization (WTO) 
  Types of trade protection  Explain,  using  a  tariff  diagram,  the  effects  of  imposing  a  tariff  on  imported goods on different stakeholders, including domestic producers, foreign producers, consumers and the 
government.  Explain,  using  a  diagram,  the  effects  of  setting  a  quota  on  foreign  producers on different stakeholders, including domestic producers, foreign producers, consumers 
and the government. 
Explain,  using  a  diagram,  the  effects  of  giving  a  subsidy  to  domestic  producers  on  different  stakeholders,  including  domestic  producers,  foreign  producers,  consumers  and  the 
government. 
Describe administrative barriers that may be used as a means of protection. 
Evaluate the effect of different types of trade protection. 
  Trade protection (HL only)  Calculate  from  diagrams  the  effects  of  imposing  a  tariff  on  imported  goods  on  different  stakeholders,  including  domestic  producers,  foreign producers, consumers and the government. Calculate from diagrams the 
effects of setting a quota on foreign producers on different stakeholders, including domestic producers, foreign producers, consumers and the government. 
Calculate from diagrams the effects of giving a subsidy to domestic producers on different stakeholders, including domestic producers, foreign producers, consumers and the government. 
  Arguments for and against  Discuss  the  arguments  in  favour  of  trade  protection,  including  the  protection  of domestic jobs, national security, protection of infant industries, the maintenance of health, safety 
trade protection (arguments  and environmental standards, anti-dumping and unfair competition, a means of overcoming a balance of payments deficit and a source of government revenue. 
against and for free trade)  Discuss  the  arguments  against  trade  protection,  including  a  misallocation  of  resources,  the  danger  of  retaliation  and  “trade wars”, the potential for corruption, increased costs of 
production due to lack of competition, higher prices for domestic consumers, increased costs of imported factors of production and reduced export competitiveness. 
Exchange rates  Determination of freely  Explain that the value of an exchange rate in a floating system is determined by the demand for, and supply of, a currency. 
floating exchange rates  Draw a diagram to show determination of exchange rates in a floating exchange rate system. 
  Causes of changes in the  Describe  the  factors  that  lead  to  changes  in  currency  demand  and  supply,  including  foreign  demand  for a country’s exports, domestic demand for imports, relative interest rates, 
exchange rate  relative inflation rates, investment from overseas in a country’s firms (foreign direct investment and portfolio investment) and speculation. 
Distinguish between a depreciation of the currency and an appreciation of the currency. 
Draw diagrams to show changes in the demand for, and supply of, a currency. 
  The effects of exchange rate  Evaluate  the  possible  economic  consequences  of  a change in the value of a currency, including the effects on a country’s inflation rate, employment, economic growth and current 
changes  account balance. 
  Exchange rates (HL only)  Calculate the value of one currency in terms of another currency. 
Calculate the exchange rate for linear demand and supply functions. 
Plot demand and supply curves for a currency from linear functions and identify the equilibrium exchange rate. 
Using exchange rates, calculate the price of a good in different currencies. Calculate the changes in the value of a currency from a set of data. 
  Fixed exchange rates  Describe a fixed exchange rate system involving commitment to a single fixed rate. 
Distinguish between a devaluation of a currency and a revaluation of a currency. 
Explain, using a diagram, how a fixed exchange rate is maintained. 
  Managed exchange rates  Explain how a managed exchange rate operates, with reference to the fact that there is a periodic government intervention to influence the value of an exchange rate. 
(managed float)  Examine the possible consequences of overvalued and undervalued currencies. 
  Evaluation of different  Compare  and  contrast  a  fixed  exchange  rate  system  with  a  floating  exchange  rate  system,  with  reference  to  factors  including  the  degree  of  certainty  for  stakeholders,  ease  of 
exchange rate systems  adjustment, the role of international reserves in the form of foreign currencies and flexibility offered to policy makers. 

11 
Dr McCormick 
IB Economics 
Master handout 

Balance of payments  The meaning of the balance  Outline the role of the balance of payments. 
of payments  Distinguish between debit items and credit items in the balance of payments. 
  The components of the  Explain the four components of the current account, specifically the balance of trade in goods, the balance of trade in services, income and current transfers. 
balance of payments accounts Distinguish between a current account deficit and a current account surplus. 
Explain the two components of the capital account, specifically capital transfers and transaction in non-produced, non-financial assets. 
Explain the three main components of the financial account, specifically, direct investment, portfolio investment and reserve assets. 
  The relationships between the Explain that the current account balance is equal to the sum of the capital account and financial account balances (see the appendix, “The balance of payments”). 
accounts  Examine how the current account and the financial account are interdependent. 
  Balance of payments (HL only)  Calculate elements of the balance of payments from a set of data. 
  The relationship between the  Explain why a deficit in the current account of the balance of payments may result in downward pressure on the exchange rate of the currency 
current account and the 
exchange rate 
  Implications of a persistent current  Discuss  the  implications  of  a  persistent  current account deficit, referring to factors including foreign ownership of domestic assets, exchange rates, interest rates, indebtedness, international credit ratings and demand 
account deficit (HL only)  management. 
  Methods to correct a persistent  Explain  the  methods  that  a  government  can  use  to  correct  a  persistent  current  account  deficit,  including  expenditure  switching  policies,  expenditure  reducing  policies  and  supply-side  policies,  to  increase 
current account deficit (HL only)  competitiveness. 
Evaluate the effectiveness of the policies to correct a persistent current account deficit. 
  The Marshall-Lerner condition andState the Marshall-Lerner condition and apply it to explain the effects of depreciation/devaluation. 
the J-curve effect (HL only)  Explain the J-curve effect, with reference to the Marshall Lerner condition. 
  The relationship between the  Explain why a surplus in the current account of the balance of payments may result in upward pressure on the exchange rate of the currency 
current account and the 
exchange rate 
  Implications of a persistent  Discuss  the  possible  consequences  of  a  rising current account surplus, including lower domestic consumption and investment, as well as the appreciation of the domestic currency 
current account surplus  and reduced export competitiveness. 
Economic integration Preferential trade agreements  Distinguish between bilateral and multilateral (WTO) trade agreements. 
Explain  that  preferential  trade  agreements  give  preferential  access  to  certain  products  from  certain  countries  by reducing or eliminating tariffs, or by other agreements relating to 
trade. 
  Trading blocs  Distinguish between a free trade area, a customs union and a common market. 
Explain that economic integration will increase competition among producers within the trading bloc. 
Compare and contrast the different types of trading blocs. 
  Trading blocs (HL only)  Explain the concepts of trade creation and trade diversion in a customs union. 
Explain that different forms of economic integration allow member countries to gain from economies of scale. 
  Monetary union  Explain that a monetary union is a common market with a common currency and a common central bank. 
Discuss the possible advantages and disadvantages of a monetary union for its members. 
Terms of trade (HL only) Measurement  Explain the meaning of the terms of trade. 
Explain how the terms of trade are measured. 
Distinguish between an improvement and a deterioration in the terms of trade. 
Calculate the terms of trade using the equation: Index of average export prices/index of average import prices x 100. 
  Causes of changes in the terms of  Explain  that  the  terms  of  trade  may  change  in  the  short  term  due  to changes in demand conditions for exports and imports, changes in global supply of key inputs (such as oil), changes in relative inflation rates 
trade  and changes in relative exchange rates. 
Explain that the terms of trade may change in the long term due to changes in world income levels, changes in productivity within the country and technological developments. 
  Consequences of changes in the  Explain how changes in the terms of trade in the long term may result in a global redistribution of income. 
  terms of trade  Examine the effects of changes in the terms of trade on a country’s current account, using the concepts of price elasticity of demand for exports and imports. Explain the impacts of 
  short-term  fluctuations  and  long-term deterioration in the terms of trade of economically less developed countries that specialize in primary commodities, using the concepts of price elasticity of demand and supply for 
  primary products and income elasticity of demand. 
 

12 
Dr McCormick 
IB Economics 
Master handout 

Development     
Economic  Economic growth and  Distinguish between economic growth and economic development. 
development  economic development  Explain  the  multidimensional  nature  of  economic  development  in  terms  of  reducing  widespread  poverty,  raising  living  standards,  reducing  income  inequalities  and  increasing 
employment opportunities. 
Explain  that  the  most  important  sources  of  economic  growth  in  economically  less  developed  countries  include  increases  in  quantities  of  physical  capital  and human capital, the 
development  and  use  of  new  technologies  that  are  appropriate  to  the  conditions  of  the  economically less developed countries, and institutional changes. Explain the relationship 
between economic growth and economic development, noting that some limited economic development is possible in the absence of economic growth, but that over the long term 
economic  growth  is  usually  necessary  for  economic  development  (however, it should be understood that under certain circumstances economic growth may not lead to economic 
development). 
  Common characteristics of  Explain,  using  examples,  that  economically  less  developed  countries share certain common characteristics (noting that it is dangerous to generalize as there are many exceptions in 
economically less developed  each case), including low levels of GDP per capita, high levels of poverty, relatively large agricultural sectors, large urban informal sectors and high birth rates. 
countries  Explain  that  in  some  countries  there  may  be  communities  caught  in  a  poverty  trap  (poverty  cycle)  where  poor  communities  are  unable  to  invest in physical, human and natural 
capital due to low or no savings; poverty is therefore transmitted from generation to generation, and there is a need for intervention to break out of the cycle. 
  Diversity among economically Explain,  using  examples,  that  economically  less  developed  countries  differ  enormously  from  each  other  in  terms  of  a variety of factors, including resource endowments, climate, 
less developed nations  history (colonial or otherwise), political systems and degree of political stability 
  International development  Outline the current status of international development goals, including the Millennium Development Goals. 
goals 
Measuring  Measurement methods: single  Distinguish between GDP per capita figures and GNI per capita figures. 
development  indicators  Compare and contrast the GDP per capita figures and the GNI per capita figures for economically more developed countries and economically less developed countries. 
Distinguish between GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange rates. Compare and contrast GDP 
per  capita  figures  and  GDP  per  capita  figures  at  purchasing  power  parity  (PPP)  exchange  rates  for  economically  more  developed  countries  and  economically  less  developed 
countries. 
Compare and contrast two health indicators for economically more developed countries and economically less developed countries. 
Compare and contrast two education indicators for economically more developed countries and economically less developed countries. 
  Measurement methods:  Explain that composite indicators include more than one measure and so are considered to be better indicators of economic development. 
composite indicators  Explain the measures that make up the Human Development Index (HDI). 
Compare and contrast the HDI figures for economically more developed countries and economically less developed countries. 
Explain why a country’s GDP/ GNI per capita global ranking may be lower, or higher, than its HDI global ranking. 
Role of domestic  Domestic factors  With reference to a specific developing economy, and using appropriate diagrams where relevant, examine how the following factors contribute to economic development. 
factors  a. Education and health 
b. The use of appropriate technology 
c. Access to credit and micro-credit 
d. The empowerment of women 
e. Income distribution 
Role of international  Trade problems facing many  With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries. 
trade  economically less developed  a. Over-specialization on a narrow range of products 
countries  b. Price volatility of primary products 
c. Inability to access international markets 
  Trade problems facing LDCs (HL With reference to specific examples, explain how the following factor is a barrier to development for economically less developed countries: long-term changes in the terms of trade 
only) 
  Trade strategies for economic  With reference to specific examples, evaluate each of the following as a means of achieving economic growth and economic development. 
growth and economic  a. Import substitution 
development  b. Export promotion 
c. Trade liberalization 
d. The role of the WTO 
e. Bilateral and regional preferential trade agreements 

13 
Dr McCormick 
IB Economics 
Master handout 

f. Diversification 
Role of Foreign  The meaning of FDI and  Describe the nature of foreign direct investment (FDI) and multinational corporations (MNCs). 
Direct Investment  MNCs  Explain the reasons why MNCs expand into economically less developed countries. 
Describe  the  characteristics  of  economically  less  developed  countries that attract FDI, including low cost factor inputs, a regulatory framework that favours profit repatriation and 
favourable tax rules. 
  Advantages and disadvantages Evaluate the impact of foreign direct investment (FDI) for economically less developed countries. 
of FDI for economically less 
developed countries 
Roles of foreign aid  Classifications and types of  Explain  that aid is extended to economically less developed countries either by governments of donor countries, in which case it is called official development assistance (ODA), or 
and multilateral  aid  by nongovernmental organizations (NGOs). 
development  Explain that humanitarian aid consists of food aid, medical aid and emergency relief aid. 
assistance  Explain  that  development aid consists of grants, concessional long-term loans, project aid that includes support for schools and hospitals, and programme aid that includes support 
for sectors such as the education sector and the financial sector. 
Explain that, for the most part, the priority of NGOs is to provide aid on a small scale to achieve development objectives. 
Explain that aid might also come in the form of tied aid. 
Explain the motivations of economically more developed countries giving aid. 
Compare and contrast the extent, nature and sources of ODA to two economically less developed countries. 
  Evaluation of foreign aid  Evaluate the effectiveness of foreign aid in contributing to economic development. 
Compare and contrast the roles of aid and trade in economic development 
  Multilateral development  Examine the current roles of the IMF and the World Bank in promoting economic development. 
assistance 
Role of international  Foreign debt and its  Outline the meaning of foreign debt and explain why countries borrow from foreign creditors. 
debt  consequences  Explain  that  in  some  cases  countries  have  become  heavily  indebted,  requiring  rescheduling  of  the  debt  payments  and/or conditional assistance from international organizations, 
including the IMF and the World Bank. 
Explain why the servicing of international debt causes balance of payments problems and has an opportunity cost in terms of foregone spending on development objectives. 
Explain that the burden of debt has led to pressure to cancel the debt of heavily indebted countries. 
Balance between  Strengths and weaknesses of  Discuss  the  positive  outcomes  of  market-oriented  policies  (such  as  liberalized  trade  and  capital  flows,  privatization  and  deregulation),  including  a  more  efficient  allocation  of 
markets and  market-oriented policies  resources  and  economic  growth.  Discuss  the  negative  outcomes  of  market-oriented  strategies,  including  market  failure,  the  development  of  a  dual  economy  and  income 
intervention  inequalities. 
  Strengths and weaknesses of  Discuss  the  strengths  of  interventionist  policies,  including  the provision of infrastructure, investment in human capital, the provision of a stable macroeconomic economy and the 
interventionist policies  provision of a social safety net. 
Discuss the limitations of interventionist policies, including excessive bureaucracy, poor planning and corruption. 
Explain the importance of good governance in the development process. 
Discuss  the  view  that  economic  development  may  best  be  achieved  through  a  complementary  approach,  involving  a  balance  of  market  oriented  policies  and  government 
intervention.  
 
   

14 
Dr McCormick 
IB Economics 
Master handout 

Definitions (HL Only in italics) 

Abnormal profit Refers to positive economic profit, arising when total revenue is greater than total economic costs (implicit plus explicit costs); is also known as ‘supernormal profit’. See economic profit.  
Absolute advantage Refers to the ability of a country to produce a good using fewer resources than another country, or, what is the same thing, the ability of a certain amount of resources in a country to produce more than the same resources can produce in another country.  
Absolute  poverty  The  inability  of  an  individual  or  a  family  to  afford  a  basic  standard  of  goods  and  services,  where  this  standard  is  absolute  and  unchanging  over  time.  Absolute  poverty  is  defined  in  relation  to  a  nationally  or 
internationally determined ‘poverty line’, which determines the minimum income that can sustain a family in terms of its basic needs.  
Actual  output  The  quantity  of  output  actually  produced  by  an  economy. In the context of the production possibilities model, it may be contrasted with production possibilities: actual output occurs somewhere inside an economy’s 
production  possibilities  curve  (PPC)  because  of  the  presence  of  unemployed  resources  and  productive  inefficiency.  In  the  context  of  the  AD-AS  model,  it  may  be  contrasted  with  potential  output,  given  by  the  position  of  an 
economy’s  long-run  aggregate  supply  (LRAS)  curve:  actual  output  may  be  higher  or  lower  than  potential  output  (if  there  is  an  inflationary  or  deflationary  gap)  or  it  may  be  equal to potential output (if the economy is in long-run 
equilibrium).  
Ad valorem taxes Taxes calculated as a fixed percentage of the price of the good or service; the amount of tax increases as the price of the good or service increases.  
Administrative barriers Trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into a country; these may include customs procedures involving inspections 
and valuation, controls on packaging, and others. Often considered to be a kind of ‘hidden’ trade protection as they don’t involve obvious trade protection measures such as tariffs and quotas.  
Aggregate  demand  The  total  quantity  of  goods  and  services  that  all  buyers  in  an  economy  (consumers,  firms,  the  government  and  foreigners)  want  to  buy  over  a  particular  time  period,  at  different  possible  price  levels, ceteris 
paribus.  
Aggregate  demand  curve  The  curve  that  shows the relationship between total quantity of goods and services that all buyers in an economy want to buy over a particular time period (aggregate demand), measured on the horizontal 
axis, plotted against the price level, measured on the vertical axis.  
Aggregate supply The total quantity of goods and services produced in an economy over a particular time period, at different price levels, ceteris paribus.  
Aid See foreign aid.  
Allocation of resources See resource allocation.  
Allocative  efficiency  An  allocation  of  resources  that  results  in  producing  the  combination  and  quantity  of  goods and services mostly preferred by consumers. It is achieved when the economy allocates its resources so that no one 
can become better off in terms of increasing their benefit from consumption without someone else becoming worse off. The condition for allocative efficiency is given by P = MC (price is equal to marginal cost).  
Anti-dumping  An  argument  that  justifies  trade  protection  policies:  if  a  country’s  trading  partner  is suspected of practising dumping, then the country should have the right to impose trade protection measures (tariffs or quotas) to 
limit quantities of the dumped good; see dumping.  
Appreciation  (of  a  currency)  Refers  to  an  increase  in the value of a currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system (compare with revaluation, which refers to an increase in 
currency value in the context of a fixed exchange rate system).  
Appropriate  technology  Technologies  that are well-suited to a country’s particular economic, geographical, ecological and climate conditions. Often used in connection with labour-abundant developing countries that require labour 
intensive (as opposed to capital- intensive) technologies.  
Asymmetric  information  A  type  of  market failure where buyers and sellers do not have equal access to information, usually resulting in an underallocation of resources to the production of goods and services, as parties to a transaction with less access to information try to 
protect themselves against the consequences of the information asymmetry.  
Automatic  stabilisers Factors that automatically, without any action by government authorities, work toward stabilising the economy by reducing the short term fluctuations of the business cycle. Two important automatic stabilisers 
are progressive income taxes and unemployment benefits.  
Average costs Costs per unit of output, or the cost of each unit of output on average. They are calculated by dividing total cost by the number of units of output produced.  
Average fixed costs Fixed cost per unit of output, or the fixed cost of each unit of output on average. They are calculated by dividing fixed cost by the number of units of output produced.  
Average product The total quantity of output of a firm per unit of variable input (such as labour); shows how much output each unit of the variable input (for example, each worker) produces on average.  
Average revenue Revenue per unit of output sold, calculated by dividing total revenue by the number of units of output produced.  
Average tax rate Tax paid divided by total income, expressed as a percentage (i.e. tax paid divided by total income multiplied by 100).  
Average total costs Total cost per unit of output, or the total cost of each unit of output on average. They are calculated by dividing total costs by the number of units of output; they are also equal to the sum of average fixed costs and average variable costs.  
Average variable costs Variable cost per unit of output, or the variable cost of each unit of output on average. They are calculated by dividing variable cost by the number of units of output.  
Balance  of  payments A record (usually for a year) of all transactions between the residents of a country and the residents of all other countries, showing all payments received from other countries (credits), and all payments made to 
other countries (debits). In the course of a year, the sum of all the credits must be equal to the sum of all the debits.  
Balance of trade in goods Part of the balance of payments, it is the value of exports of goods minus the value of imports of goods over a specific period of time (usually a year).  
Balance of trade in services Part of the balance of payments, it is the value of exports of services minus the value of imports of services over a specific period of time (usually a year)  
Balance on capital account The sum of inflows minus outflows of funds in the capital account of the balance of payments. See capital account.  
Balance on current account The sum of inflows minus outflows of funds in the current account of the balance of payments. See current account. 
Balance on financial account The sum of inflows of funds minus outflows in the financial account of the balance of payments. See financial account.  
Balanced budget Referring usually to the government’s budget, it is the situation where government tax revenues are equal to government expenditures over a specific period of time (usually a year).  
Barriers to entry Anything that can prevent a fi rm from entering an industry and beginning production, as a result limiting the degree of competition in the industry.  

15 
Dr McCormick 
IB Economics 
Master handout 

Bilateral  trade  agreement  Any  trade  agreement  (or  agreement  to  lower  international  trade  barriers)  involving  two  trading  partners,  usually  two  countries.  It  may  also  involve  a  trade agreement between one country and another 
group of countries when this groups acts as a single unit (such as the European Union). May be contrasted with regional trade agreement and multilateral trade agreement.  
Break-even point The point of production of a firm where its total revenue is exactly equal to its total costs (economic costs), and it is therefore earning normal profit, or zero economic (supernormal) profit  
Break-even price A price at which the firm breaks even, meaning that its total revenues are just equal to its total costs (economic costs); at the break-even price the firm is earning zero economic (supernormal) profit, but it is earning normal profit.  
Budget deficit Referring usually to the government’s budget, it is the situation where government tax revenues are less than government expenditures over a specific period of time (usually a year).  
Budget surplus Referring usually to the government’s budget, it is the situation where government tax revenues are greater than government expenditures over a specific period of time (usually a year).  
Business  confidence  A  measure  of  the  degree  of  optimism  among  firms  in  an  economy  about  the  future  performance  of  firms  and  the  economy;  it  is  measured  on  the  basis  of  surveys  of  business  managers.  Is  an  important 
determinant of the investment component of aggregate demand.  
Business cycle Fluctuations in the growth of real output, or real GDP, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output); also known as trade cycles.  
Cap  and  trade  scheme  A  scheme  in  which  a  government  authority  (of  a  single  country  or  a  group  of  countries)  sets  a limit or ‘cap’ on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution 
permits (known as tradable permits) distributed to firms; firms that want to pollute more than their permits allow can buy more permits in a market, while firms that want to pollute less can sell their excess permits.  
Capital  One  of  the  factors  of  production,  which  itself  has  been  produced  (it  does  not  occur  naturally),  also  known  as  ‘physical  capital’,  including  machinery,  tools,  equipment, buildings, etc. Physical capital is also referred to as a 
‘capital  good’ or ‘investment good’. Other types of capital include ‘human capital’, or the skills, abilities, knowledge and levels of good health acquired by people; ‘natural capital’, or everything that traditionally has been included in the 
factor of production ‘land’; and ‘financial capital’, or purchases of financial instruments such as stocks and bonds.  
Capital  account  In  the  balance  of  payments,  refers  to  the  inflows  minus  outflows  of  funds  for  (i)  capital  transfers’  (including  such  things  as  debt  forgiveness  and  non-life  insurance  claims),  and  (ii)  the  purchase  or  use  of 
non-produced natural resources (such as mineral rights, forestry rights, fishing rights and airspace); it is a relatively unimportant part of the balance of payments.  
Capital account balance See balance on capital account.  
Capital expenditures With reference to government expenditures, these include public investments, or the production of physical capital, such as building roads, airports, harbours, school buildings, hospitals, etc.  
Capital  liberalisation Refers to the free movement of financial capital in and out of a country, occurring through the elimination by the government of exchange controls (government restrictions on the quantity of foreign exchange 
that can be bought by domestic residents of a country).  
Capital transfers A part of the capital account of the balance of payments, they include inflows minus outflows for such things as debt forgiveness, non-life insurance claims, and investment. See capital account.  
Carbon tax A tax per unit of carbon emissions of fossil fuels, considered by many countries as a policy to deal with the problem of climate change.  
Cartel  A  formal  agreement  between  firms  in  an  industry  to  undertake  concerted  actions  to limit competition; is formed in connection with collusive oligopoly. It may involve fixing the quantity to be produced by each firm, or fixing the price at which output can be sold, and 
other actions. The objective is to increase the monopoly power of the firms in the cartel. Cartels are illegal in many countries.  
Central bank A financial institution that is responsible for regulating the country’s financial system and commercial banks, and carrying out monetary policy.  
Ceteris  paribus  A Latin expression that means ‘other things being equal’. Another way of saying this is that all other things are assumed to be constant or unchanging. It is used in economics theories and models to isolate changes in 
only those variables that are being studied.  
Circular  flow  of  income  model  A  model  showing  the  flow  of  resources  from  consumers  (households)  to  firms,  and the flow of products from firms to consumers, as well as money flows consisting of consumers’ income arising 
from the sale of their resources and firms’ revenues arising from the sale of their products. It illustrates the equivalence of expenditure fl ows, value of output flows, and income flows.  
Clean technology Technology that is not polluting, associated with environmental sustainability; includes solar power, wind power, hydropower, recycling, and many more.  
Closed  economy  An  economy  that  has  no  international  trade  (no  imports  and  exports);  usually  appears  in  connection  with  economic  theories  and  models  as  virtually  no  economy  in  the  real  world  is  a  closed  economy.  To  be 
contrasted with open economy.  
Collusion An agreement among firms to fix prices, or divide the market between them, so as to limit competition and maximise profit; usually involves firms in oligopoly.  
Collusive oligopoly Refers to the type of oligopoly where firms agree to restrict output or fix the price, in order to limit competition, increase monopoly power and increase profits. See also cartel.  
Commercial  bank  A  financial  institution  (which may be private or public) whose main functions are to hold deposits for their customers (consumers and firms), to make loans to their customers, to transfer funds by cheque (check) 
from one bank to another, and to buy government bonds.  
Common  access  resources  Resources  that  are not owned by anyone, do not have a price, and are available for anyone to use without payment (for example, lakes, rivers, fish in the open seas, open grazing land, the ozone layer and 
many more); their depletion or degradation leads to environmental unsustainability.  
Common  market  A  type  of  trading  bloc  in  which  countries  that  have  formed  a  customs  union  proceed  further  to  eliminate  any  remaining  tariffs  in  trade  between  them;  they  continue  to  have  a common external policy (as in a 
customs  union),  and  in  addition  agree  to  eliminate  all  restrictions  on  movements  of  any  factors of production within them; factors affected are mainly labour and capital, which are free to cross all borders and move, travel and find 
employment freely within all member countries. The best-known common market is the European Economic Community (EEC, the precursor of the present European Union).  
Community surplus See social surplus.  
Comparative advantage Arises when a country has a lower relative cost, or opportunity cost, in the production of a good than another country. Forms the basis of the theory of comparative advantage.  
Competitive market A market composed of many buyers and sellers acting independently, none of whom has any ability to influence the price of the product (i.e. no market power). 
Competitive  supply  In  the  case  of  two  goods,  refers  to  production  of one or the other by a firm; in other words the two goods compete with each other for the same resources (for example, if a farmer can produce wheat or corn, 
producing more of one means producing less of the other).  
Competition Occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market.  

16 
Dr McCormick 
IB Economics 
Master handout 

Complements (complementary goods) Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.  
Composite indicator A summary measure of more than one indicator, often used to measure economic development; for example the Human Development Index (HDI), that measures income, education and health indicators.  
Concentration  ratio  A  measure  of  how  much  an  industry’s  production  is  concentrated  among the industry’s largest firms; it measures the percentage of output produced by the largest firms in an industry, and is used to provide an indication of the degree of competition or 
degree of monopoly power in an industry. The higher the ratio, the greater the degree of monopoly power.  
Concessional loan Loans that are offered as part of foreign aid, made on concessional terms, i.e. that they are offered at interest rates that are lower than commercial rates, with longer repayment periods.  
Conditional  assistance  Refers  to  development  assistance provided by bilateral or multilateral development organisations, which is extended to countries on condition that they satisfy certain requirements, usually requiring that they 
adopt particular policies.  
Constant  returns  to  scale Refers to the situation where the output of a firm changes in the same proportion as all its inputs; given a percentage increase in all inputs, output increases by the same percentage. May be contrasted with increasing returns to scale and decreasing 
returns to scale.  
Consumer  confidence  A  measure  of  the  degree  of  optimism  of  consumers  about  their  future  income  and  the  future  of  the  economy;  it  is  measured  on  the  basis  of  surveys  consumers.  Is  an  important  determinant  of  the 
consumption component of aggregate demand.  
Consumer  price  index  A  measure  of  the  cost  of  living  for  the  typical  household;  it  compares  the  value  of  a  basket  of  goods  and  services  in  one  year  with the value of the same basket in a base year. Inflation (and deflation) are 
measured as a percentage change in the value of the basket from one year to another.  
Consumer  surplus  Refers  to  the  difference  between  the  highest  prices  consumers  are  willing  to  pay  for  a  good and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by 
consumers.  
Consumption Spending by households (consumers) on goods and services (excludes spending on housing).  
Contractionary  fiscal  policy  Refers  to  fiscal  policy  usually  pursued  in  an  inflation,  involving  a  decrease  in  government  spending  or  an  increase  in  taxes  (or  both). May be contrasted with expansionary fiscal policy. See also fiscal 
policy.  
Contractionary  monetary  policy  Refers to monetary policy usually pursued in an inflation, involving an increase in interest rates, intended to lower investment and consumption spending; also known as ‘tight monetary policy’. May 
be contrasted with expansionary monetary policy. See also monetary policy.  
Core rate of inflation A rate of inflation based on a consumer price index that excludes goods with highly volatile (unstable) prices, notably food and energy prices.  
Corporate indebtedness The degree to which corporations have debts (see indebtedness).  
Corporate  social  responsibility  The  practice  of  some  corporations to avoid socially undesirable activities, such as polluting activities, employing children, or employing workers under unhealthy conditions; as well as undertaking socially desirable activities, such as support 
for human rights and donations to charities.  
Cost-push  inflation  A  type  of  inflation  caused  by  a  fall  in aggregate supply, in turn resulting from increases in costs of production (for example, wages or prices of other inputs), shown in the AD-AS model as leftward shifts of the 
AS curve.  
Costs of production The total opportunity costs incurred by firms in order to acquire resources for use in production; include explicit costs (for purchased resources) and implicit costs (for self-owned resources).  
Credit items In the balance of payments, refer to payments received from other countries, entering the balance of payments accounts with a plus sign; they represent an inflow of foreign exchange into a country.  
Cross-price  elasticity  of  demand  (XED)  A  measure  of  the  responsiveness  of the demand for one good to a change in the price of another good; measured by the percentage change in the quantity of one good demanded divided 
by the percentage change in the price of another good. If XED > 0 the two goods are substitutes; if XED < 0, the two goods are complements.  
Crowding-out  Refers  to  the  possible  impacts  on  real  GDP  of  increased  government  spending  (expansionary  fiscal  policy)  financed  by  borrowing;  if  increased  government  borrowing  results  in  a higher rate of interest, this could 
reduce private investment spending, thus reversing the impacts of the government’s expansionary fiscal policy.  
Current  account  In  the  balance  of  payments,  this  includes  the  balance  of  trade (recording exports minus imports of goods) plus the balance on services (recording exports of services minus imports of services), plus inflows minus 
outflows of income and current transfers. The most important part of the current account in most countries is the balance of trade.  
Current account balance See balance on current account.  
Current account deficit Occurs when the current account balance has a negative value, meaning that debits are larger than credits (there is an excess of debits).  
Current account surplus Occurs when the current account balance has a positive value, meaning that credits are larger than debits (there is an excess of credits).  
Current  expenditures  In  the  government  budget,  refers  to  government  spending  on  day-to-day  items  that  are  recurring  (i.e.  repeat  themselves)  and  items  that  are  used  up  or  ‘consumed’ as a good or service is provided. Include 
wages  and  salaries  (for  all  government  employees);  spending  for  supplies  and  equipment  for  the  day-to-day operation of government activities (for example, school supplies and medical supplies for public schools and public health 
care services); provision of subsidies; and interest payments on government loans.  
Current transfers An item in the current account of the balance of payments, refers to inflows and outflows of funds for items including gifts, foreign aid, and pensions.  
Customs  union  A  type  of  trading  bloc,  consisting  of  a  group  of  countries  that  fulfil  the  requirements  of  a  free  trade  area  (elimination  of  trade  barriers  between  members)  and  in  addition  adopt  a  common  policy  towards  all 
non-member  countries;  members  of  a  customs  union  also  act  as  a  group  in  all  trade  negotiations  and  agreements  with  non-members.  It  achieves  a  higher  degree  of  economic  integration  than  a  free  trade  area,  but  lower  than  a 
common market.  
Cyclical  unemployment  A  type  of  unemployment  that  occurs  during  the  downturns  of  the  business  cycle,  when  the  economy  is in a recessionary gap; the downturn is seen as arising from declining or low aggregate demand, and 
therefore is also known as ‘demand-deficient’ unemployment.  
Debit items In the balance of payments, refer to payments made to other countries, entering the balance of payments accounts with a minus sign; they represent an outflow of foreign exchange from a country.  

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Deciles Division of a population into ten equal groups with respect to the distribution of a variable, such as income; for example, the lowest income decile refers to 10% of the population with the lowest income. 
Decreasing  returns  to  scale  Refers to the situation where the output of a firm changes less than in proportion to a change in all its inputs; given a percentage increase in all inputs, output increases by a smaller percentage. May be contrasted with constant returns to 
scale and increasing returns to scale.  
Deficit  In  general,  this  is  the  deficiency  of  something  compared  with  something  else.  (i)  In  the  balance  of  payments,  a  ‘deficit’  in  an  account  occurs  when  the  credits  (inflows  of  money  from  abroad)  are  smaller  than  the debits 
(outflows  of  money  to  other  countries);  for  example,  a  deficit  in  the  balance  of  trade  means  that  the value of exports (credits) is smaller than the value of imports (debits). (ii) In the case of the government budget, a ‘deficit’ occurs 
when government revenues are smaller than government expenditures.  
Deflation A continuing (or sustained) decrease in the general price level.  
Deflationary gap See recessionary gap.  
Demand Indicates the various quantities of a good that consumers (or a consumer) are willing and able to buy at different possible prices during a particular time period, ceteris paribus.  
Demand-deficient unemployment See cyclical unemployment.  
Demand curve A curve showing the relationship between the quantities of a good consumers (or a consumer) are willing and able to buy during a particular time period, and their respective prices, ceteris paribus. 
Demand management Policies that focus on the demand side of the economy, attempting to influence aggregate demand to achieve the goals of price stability, full employment and economic growth.  
Demand-pull inflation A type of inflation caused by an increase in aggregate demand, shown in the AD-AS model as a rightward shift in the AD curve.  
Demand-side  policies  Policies  that  attempt  to  change  aggregate demand (shift the aggregate demand curve in the AD-AS model) in order to achieve the goals of price stability, full employment and economic growth, and minimise 
the  severity  of  the  business  cycle.  In  the  event  of  an inflationary or recessionary (deflationary) gap, they try to bring aggregate demand to the full employment level of real GDP, or potential GDP. They can also impact on economic 
growth by contributing to increases in potential GDP. Consists of fiscal and monetary policies. To be contrasted with supply-side policies.  
Demerit  goods  Goods  that  are  considered  to  be  undesirable  for  consumers  and  are  over  provided  by  the  market.  Reasons  for  overprovision  may  be  that  the  goods  have  negative  externalities,  or  consumer  ignorance  about the 
harmful effects.  
Depreciation  (of  a  currency)  Refers  to  a  decrease  in  the  value  of  a currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system (to be compared with devaluation, which is a decrease in 
currency value in a fixed exchange rate system). (Note that depreciation also refers to capital goods that become worn out and are discarded.)  
Deregulation Policies involving the elimination or reduction of government regulation of private sector activities, based on the argument that government regulation stifles competition and increases efficiency.  
Deterioration in the terms of trade A decrease in the value of the terms of trade index. See terms of trade.  
Determinants  of  aggregate  demand  Factors  that  cause  shifts  of  the  aggregate  demand  curve;  include  factors  that  influence  consumption  spending  (C),  investment  spending  (I),  government  spending  (G) and net exports (Xn). 
Determinants of demand See non-price determinants of demand.  
Determinants of supply See non-price determinants of supply.  
Devaluation  (of  a  currency)  Refers  to  a  decrease  in  the  value  of  a  currency  in  the  context  of  a  fixed  exchange  rate  system  (to  be  compared  with depreciation, which is a decrease in currency value in the context of a floating (or 
flexible) or managed exchange rate system).  
Development  aid  Foreign  aid  intended  to  help  economically  less development countries; may involve project aid, programme aid, technical assistance or debt relief. direct investment In the balance of payments, refers to inflows or 
outflows of funds for the purpose of foreign direct investment. See foreign direct investment.  
Direct taxes Taxes paid directly to the government tax authorities by the taxpayer, including personal income taxes, corporate income taxes and wealth taxes.  
Diseconomies  of  scale  Increases  in  the  average  costs  of  production  that  occur  as  a  firm  increases  its  output  by  varying  all its inputs (i.e. in the long run). Diseconomies of scale are responsible for the upward sloping part of the long-run average total cost curve: as a firm 
increases its size, costs per unit of output increase.  
Disinflation Refers to a fall in the rate of inflation; it involves a positive rate of inflation and should be contrasted with deflation.  
Disposable income The income of consumers that is left over after the payment of income taxes.  
Distribution of income Concerned with how much of an economy’s total income different individuals or different groups in the population receive, and involves answering the ‘for whom’ basic economic question.  
Diversification Generally refers to change involving greater variety, and is used to refer to increasing the variety of goods and services produced and/or exported by a country; it is the opposite of specialisation.  
Dual  economy  Arises when there are two different and opposing sets of circumstances that exist simultaneously, often found in economically less developed countries, such as for example, wealthy, highly educated groups coexisting 
with poor, illiterate groups, a formal and informal urban sector, and a low-productivity agricultural sector and a high-productivity urban industrial sector.  
Dumping The practice of selling a good in international markets at a price that is below the cost of producing it (usually by providing export subsidies); while it is illegal according to international trade rules, many countries practise it 
anyway. Forms the basis of the anti-dumping argument in favour of trade protection. See also anti-dumping.  
Easy monetary policy See expansionary monetary policy.  
Economic costs The sum of explicit costs and implicit costs, or the total opportunity costs incurred by a firm for its use of resources, whether purchased or self-owned. When economists refer to ‘costs’ they are actually referring to ‘economic costs’.  
Economic  development  Broad-based  rises  in  the  standard  of  living  and  well-being  of  a population, particularly in economically less developed countries. It involves increasing income levels and reducing poverty, reducing income 
inequalities and unemployment, and increasing provision of and access to basic goods and services such as food and shelter, sanitation, education and health care services.  
Economic efficiency A condition that arises when allocative efficiency is achieved. See allocative efficiency.  
Economic growth Increases in total real output produced by an economy (real GDP) over time; may also refer to increases in real output (real GDP) per capita (or per person).  

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Master handout 

Economic  integration  Refers  to  economic  interdependence  between  countries,  usually  achieved  by  agreement  between  countries  to  reduce  or  eliminate  trade  and  other  barriers  between  them.  There  are  various  degrees  of 
integration, depending on the type of agreement and the degree to which barriers between countries are removed; see trading bloc, free trade area, customs union, common market, monetary union.  
Economic profit Is a firm's total revenue minus total economic costs (explicit plus implicit). If economic profit is positive, the firm is earning supernormal (abnormal) profit; if it is zero, the firm is earning normal profit; if it is negative, the firm is making a loss.  
Economically  less  developed  countries  According  to  the  World  Bank’s classification system, includes countries that have a per capita GNI below a particular level (which changes from year to year); some common characteristics 
include low levels of GDP per capita, high levels of poverty, large agricultural sectors and large urban informal sectors (though it is dangerous to generalise about these characteristics). 
Economically  more  developed  countries  According  to  the  World Bank’s classification system, includes countries that have a per capita GNI above a particular level (which changes from year to year); they generally have relatively 
high levels of GDP per capita, relatively low levels of poverty, small agricultural sectors, and large industrial and services sectors (though it is dangerous to generalise about these characteristics).  
Economics The study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.  
Economies  of  scale  Decreases  in  the  average  costs  of  production  that  occur as a firm increases its output by varying all its inputs (i.e. in the long run). Economies of scale explain the downward-sloping portion of the long-run average total cost curve: as a firm increases its 
size, the costs per unit of output fall.  
Elasticity  In  general,  this  is  a  measure  of  the  responsiveness  or  sensitivity  of  a  variable  to  changes  in  any  of  the  variable’s  determinants.  See  specific  elasticities: price elasticity of demand, cross-price elasticity of demand, income 
elasticity of demand, price elasticity of supply.  
Empowerment Creation of conditions for equality of opportunities; involves increasing the political, social, and economic power of individuals or groups of individuals.  
Entrepreneurship  One  of  the  factors  of  production,  involving  a special human skill that includes the ability to innovate by developing new ways of doing things, to take business risks and to seek new opportunities for opening and 
running a business. Entrepreneurship organises the other three factors of production (land, labour and capital) and takes on the risks of success or failure of a business.  
Equilibrium A state of balance such that there is no tendency to change. See also market equilibrium and equilibrium level of output (or of real GDP).  
Equilibrium  level  of  output  The  level  of  output  (real  GDP)  where  the  aggregate  demand  curve  intersects  the  aggregate  supply  curve  (also  known  as  the  ‘equilibrium  level  of  income’).  Note  the  distinction  between  short-run 
equilibrium level of output and long run equilibrium level of output.  
Equilibrium level of real GDP See equilibrium level of output.  
Equilibrium price The price determined in a market when quantity demanded is equal to quantity supplied, and there is no tendency for the price to change; it is the price that prevails when there is market equilibrium.  
Equilibrium quantity The quantity that is bought and sold when a market is in equilibrium, i.e. when quantity demanded is equal to quantity supplied.  
Equity  The  condition  of  being  fair  or  just;  should  be  contrasted  with  the  term  ‘equality’.  Often  used  in  connection  with  income  distribution,  in  which case it is usually interpreted to mean income equality (though this is only one 
possible interpretation of equity).  
Errors  and  omissions  In  the  balance  of  payments,  refers  to  an  item  that  is  included  to  account  for  possible  omissions  and  errors  in  items  that  have  been  included  or  excluded,  in  order  to  ensure  that  the  balance  of  payments 
balances, i.e. that the sum of credits and debits is equal to zero.  
Excess demand In the context of demand and supply, occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good; see shortage.  
Excess supply In the context of demand and supply, occurs when the quantity of a good demanded is smaller than the quantity supplied, leading to a surplus; see surplus.  
Exchange  rate  The  rate at which one currency can be exchanged for another, or the number of units of foreign currency that correspond to the domestic currency; can be thought of as the ‘price’ of a currency, which is expressed in 
terms of another currency.  
Excise taxes Taxes imposed on spending on particular goods or services (for example, gasoline/petrol); are a type of indirect tax. See indirect taxes.  
Excludable  A  characteristic  of  goods  according  to  which  it  is  possible  to  exclude  people  from  using  the  good  by  charging  a  price  for  it; if someone is unwilling or unable to pay the price they will be excluded from using it. Most 
goods are excludable. It is one of the two characteristics of ‘private goods’. See also rivalrous.  
Expansionary  fiscal  policy  Refers  to  fiscal  policy  usually  pursued  in  a  recession,  involving  an  increase  in  government  spending  or  a  decrease  in  taxes  (or  both).  May be contrasted with contractionary fiscal policy. See also fiscal 
policy.  
Expansionary  monetary  policy  Refers  to  monetary policy usually pursued in a recession, involving a decrease in interest rates, intended to increase investment and consumption spending; also known as ‘easy monetary policy’. May 
be contrasted with contractionary monetary policy. See also monetary policy.  
Expenditure  approach  A  method  used  to  measure  the  value  of  aggregate  output  of  an  economy,  which  adds  up  all spending on final goods and services produced within a country within a given time period. As suggested by the 
circular flow model, it is equivalent to measurement by the income approach and the output approach.  
Expenditure flow In the simple circular flow of income model, it is the flow of spending from households to firms to buy the goods and services produced by the firms; the expenditure flow is equal to the income flow and the value 
of output flow.  
Expenditure-reducing policies Policies that involve reducing expenditures in the domestic economy so as to bring about a decrease in imports in order to correct a current account deficit; they include contractionary fiscal and monetary policies.  
Expenditure-switching policies Policies that involve switching consumption away from imported goods and towards domestically produced goods, in order to correct a current account deficit; include trade protection policies and depreciation.  
Explicit costs Costs of production that involve a money payment by a firm to an outsider in order to acquire a factor of production that is not owned by the firm. Is a type of opportunity cost; should be contrasted with implicit costs.  
Export  promotion  Refers  to  a  growth  and  trade  strategy  where  a  country  attempts  to achieve economic growth by expanding its exports. As a trade strategy, it looks outward towards foreign markets and is based on stronger links 
between the domestic and global economies. To be contrasted with import substitution.  
Externality  Occurs  when  the  actions  of  consumers  or  producers  give  rise  to  positive  or  negative  side-effects  on  other  people  who  are  not  part  of  these  actions,  and  whose  interests  are  not  taken  into  consideration.  Positive 
externalities give rise to positive side-effects; negative externalities to negative side-effects.  

19 
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IB Economics 
Master handout 

Factor  endowments  The  factors  of  production  that  a  country  is  ‘endowed  with’,  or  possesses.  Differing  factor  endowments  among  countries  suggests  that  different  countries  are  better suited to the production of certain kinds of goods and services than others, or, to put it 
differently, they are more efficient in the production of some things rather than others. Differing factor endowments form the basis of the theory of comparative advantage. (Also known as ‘resource endowments’.)  
Factors of production All resources, or inputs (land, labour, capital, entrepreneurship) used to produce goods and services.  
Financial account In the balance of payments, refers to inflows minus outflows of funds due to foreign direct investment, portfolio investment and changes in reserve assets.  
Financial account balance See balance on financial account.  
Fiscal policy Manipulations by the government of its own expenditures and taxes in order to influence the level of aggregate demand; it is a type of demand side policy or demand management.  
Fixed  costs  Costs  that  arise  from  the  use  of  fixed  inputs,  which  do  not  change  as  output  increases  or  decreases (hence they are ‘fixed’). Fixed costs arise only in the short run, or the period of time when there is at least one fixed input. Examples include rental payments, 
property taxes and insurance premiums.  
Fixed  exchange  rate  Refers  to  an  exchange  rate  that  is  fixed  by  the  central  bank  of  a  country, and is not permitted to change in response to changes in currency supply and demand. Maintaining the value of a currency at its fixed 
rate requires constant intervention by the central bank or government. 
Fixed exchange rate system An exchange rate system where exchange rates are fixed by the central bank of each country. See fixed exchange rate.  
Flexible labour market See labour market flexibility.  
Floating exchange rate See freely floating exchange rate.  
Floating exchange rate system See freely floating exchange rate system.  
Foreign  aid  Consists of concessional financial flows from the developed world to economically less developed countries, and includes concessional loans and grants. See also concessional loan and official development assistance. To 
be contrasted with multilateral development assistance.  
Foreign  debt  Refers  to  external  debt,  meaning  the  total amount of debt (public and private) incurred by borrowing from foreign creditors (i.e. lenders). The global problem of debt involves large volumes of public (i.e. government) 
debt.  
Foreign  direct  investment  (FDI)  Refers  to  investment  by  firms  based  in  one  country  (the  home  country)  in  productive  activities  in  another  country  (the  host  country).  Firms  that  undertake  FDI  are  called  multinational 
corporations.  
Foreign exchange Refers to foreign national currencies, i.e. for any country, it refers to currencies other than its own.  
Formal collusion An agreement between firms (usually in oligopoly) to limit output or fix prices, in order to restrict competition; is likely to involve the formation of a cartel. Also known as ‘open collusion’.  
Free entry and exit The condition in which firms face no barriers to entering or exiting an industry, characteristic of the market structures of perfect competition and monopolistic competition.  
Free  rider  problem  Occurs  when  people  can  enjoy  the  use  of  a  good  without  paying  for  it,  and  arises  from  non-excludability:  people  cannot  be  excluded  from using the good, because it is not possible to charge a price. Is often 
associated with public goods, which are a type of market failure: due to the free rider problem, private firms fail to produce these goods.  
Free trade The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions (or barriers) between individuals or firms in different countries.  
Free  trade area A type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves; it is the most common type of integration area, and involves a lower degree of economic integration 
than a customs union or common market. Each member country retains the right to pursue its own trade policy towards non member countries. An example of a free trade area is NAFTA (North American Free Trade Agreement).  
Freely  floating exchange rate An exchange rate determined entirely by market forces, or the forces of supply and demand. There is no government intervention in the foreign exchange market to influence the value of the exchange 
rate. Also known as ‘floating exchange rate’ or ‘flexible exchange rate’.  
Freely floating exchange rate system An exchange rate system where exchange rates are determined entirely by market forces; see freely floating exchange rate.  
Frictional  unemployment  A  type  of  unemployment  that  occurs  when  workers  are  between  jobs;  workers  may  leave  their  job  because  they  have  been  fired,  or  because their employer went out of business, or because they are in 
search of a better job, or they may be waiting to begin a new job; tends to be short term.  
Full  employment  (i)  In  the  context  of  the  production  possibilities  model,  refers  to  maximum  use  of  all resources in the economy to produce the maximum quantity of goods and services that the economy is capable of producing 
(production  possibilities),  implying  zero  unemployment.  (ii)  In  the  context  of  the  AD–AS  model,  refers  to  the natural rate of unemployment, or unemployment that prevails when the economy is producing potential output, or real 
GDP, determined by the position of the LRAS curve (when the economy is in long equilibrium). See also natural rate of unemployment). Note that in this context, ‘full employment’ refers to employment of labour resources.  
Full  employment  level  of  output  (real  GDP)  The  level  of  output  (or  real  GDP) at which unemployment is equal to the natural rate of unemployment; the level of output (real GDP) where there is no deflationary or recessionary 
gap. Also known as potential output (potential GDP).  
Game  theory  A  mathematical  technique  analyzing  the  behaviour  of  decision  makers  who  are  dependent  on  each  other,  and  who  use  strategic  behaviour as they try to anticipate the behaviour of their rivals. Has become an important tool in microeconomics, often used to 
analyse the behaviour of oligopolistic firms; is based heavily on the work of American mathematician and economist John Nash.  
GDP See gross domestic product.  
GDP deflator See price deflator.  
GDP per capita Gross domestic product divided by the number of people in the population; is an indicator of the amount of domestic output per person in the population.  
Gini  coefficient  A  summary  measure  of  the  information  contained  in  the  Lorenz  curve  of  an  economy,  defined  as  the  area  between  the  diagonal  and  the  Lorenz  curve,  divided  by  the  entire  area  under  the  diagonal.  The  Gini 
coefficient has a value between 0 and 1; the larger the Gini coefficient, and the closer it is to 1, the greater is the income inequality.  
GNI See gross national income.  
GNI per capita Gross national income divided by the number of people in the population; is an indicator of the amount of income in an economy per person in the population.  

20 
Dr McCormick 
IB Economics 
Master handout 

Governance Refers to the way of governing, and the exercise of power in the management of an economy’s economic and social resources, in order to achieve particular objectives such as economic growth and development.  
Government budget A type of plan of a country’s tax revenues and government expenditures over a period of time (usually a year). 
Government debt See public debt.  
Government intervention The practice of government to intervene (interfere) in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.  
Government spending Spending undertaken by the government, as part of its fiscal policy or as part of an effort to meet particular economic and social objectives (such as provision of subsidies, provision of public goods, etc.).  
Grant A type of foreign aid consisting of funds that are in effect gifts (they do not have to be repaid).  
Green GDP Gross domestic product (GDP) which has been adjusted to take into account environmental destruction and/or health consequences of environmental problems.  
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); it is a commonly 
used measure of the value of aggregate output; to be contrasted with gross national income (GNI).  
Gross  national  income  (GNI)  A  measure  of  the  total  income  received  by  the  residents  of  a  country,  equal  to  the  value  of  all  final  goods  and  services  produced  by  the  factors  of  production  supplied  by  the country’s residents 
regardless of where the factors are located; GNI = GDP plus income from abroad minus income sent abroad. Formerly known as gross national product (GNP); may be contrasted with gross domestic product (GDP).  
Gross national product (GNP) See gross national income.  
Growth See economic growth.  
Growth  maximisation  A  possible  goal  of  firms,  that  differs  from  the  goal  of  profit  maximisation  assumed  by  standard  microeconomic  theory,  involving the achievement of the highest possible growth, for various reasons such as achieving economies of scale, diversifying, 
achieving market power, or others.  
Hidden  unemployment  Unemployment  that  is  not  counted  in  official  unemployment  statistics  because  of  such  factors  as the exclusion of ‘discouraged workers’, the practice of considering part time workers as full-time workers, 
and others. 
Homogeneous product A product that is completely standardised and not differentiated; is characteristic of products in perfect competition.  
Household indebtedness The degree to which households have debts (see indebtedness).  
Human  capital  The  skills,  abilities  and  knowledge  acquired  by  people,  as  well  as good levels of health, all of which make them more productive; considered to be a kind of ‘capital’ because it provides a stream of future benefits by 
increasing the amount of output that can be produced in the future.  
Human  Development  Index  (HDI)  A  composite indicator of development which includes indicators that measure three dimensions of development: income per capita, levels of health and educational attainment; is considered to 
be a better indicator of development than single indicators such as GNI per capita.  
Humanitarian  aid  Foreign  aid  extended  in  regions  where  there are emergencies caused by violent conflicts or natural disasters such as floods, earthquakes and tsunamis, intended to save lives, ensure access to basic necessities such 
as food, water, shelter and health care, and provide assistance with reconstruction.  
Implicit costs Costs of production involving sacrificed income arising from the use of self-owned resources by a firm; is a type of opportunity cost; should be contrasted with explicit costs.  
Import quota see quota.  
Import  substitution  Also  known  as  import-substituting  industrialisation,  refers  to  a  growth  and  trade  strategy  where  a  country  begins to manufacture simple consumer goods oriented towards the domestic market (such as shoes, 
textiles,  beverages,  electrical  appliances)  in  order  to  promote  its  domestic  industry;  it  presupposes  the  imposition  of  protective  measures  (tariffs,  quotas,  etc.)  that  will  prevent  the  entry  of  imports  that  compete  with  domestic 
producers. To be contrasted with export promotion.  
Improvement in the terms of trade An increase in the value of the terms of trade index. See terms of trade.  
Incentive-related  policies  Policies  involving  reduction  of  various  types  of  taxes  (such  as  income  taxes  and  business  taxes),  in  the  expectation  that  the  tax  cuts  will  change  the  incentives  faced  by  taxpayers;  for  example, cuts in 
income taxes may encourage the desire to work; cuts in business taxes may encourage investment. Are a type of supply-side policy.  
Incidence of taxes See tax incidence.  
Income In the current account of the balance of payments, refers to inflows of wages, rents, interest and profits earned abroad minus the same income factors that are sent abroad.  
Income  approach  A  method  used to measure the value of aggregate output of an economy, which adds up all income earned by the factors of production in the course of producing all goods and services within a country in a given 
time period. As suggested by the circular flow model, it is equivalent to measurement by the expenditure approach and the output approach.  
Income distribution See distribution of income.  
Income elastic demand Relatively high responsiveness of demand to changes in income; YED (income elasticity of demand) > 1. See income elasticity of demand.  
Income elasticity of demand A measure of the responsiveness of demand to changes in income; measured by the percentage change in quantity demanded divided by the percentage change in price.  
Income  flow  In  the  simple  circular  flow  of  income model, refers to the flow of income of households that they receive by selling their factors of production (resources) to firms; the income flow is equal to the expenditure flow and 
the value of output flow.  
Income inelastic demand Relatively low responsiveness of demand to changes in income; YED (income elasticity of demand) < 1. See income elasticity of demand.  
Income redistribution See redistribution of income.  
Increasing  returns  to  scale  Refers  to  the  situation  where  the  output  of  a  firm  changes more than in proportion to a change in all its inputs; given a percentage increase in all inputs, output increases by a larger percentage. May be contrasted with constant returns to scale 
and decreasing returns to scale.  
Indebtedness Refers to the level of debt, or the amount of money owed to creditors (lenders); may be on a household, firm, or country level.  

21 
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Master handout 

Indirect  taxes  Taxes  levied  on  spending to buy goods and services, called indirect because, whereas payment of some or all of the tax by the consumer is involved, they are paid to the government authorities by the suppliers (firms), 

that is, indirectly.  
Industrial  policies  Government  policies  designed  to  support  the  growth  of  the industrial sector of an economy; may include support for small and medium-sized firms or support for ‘infant industries’ through tax cuts, grants, low 
interest loans and other measures, as well as investment in human capital, research and development, or infrastructure development in support of industry.  
Infant  industry  A  new  domestic  industry  that  has  not  had  time  to  establish  itself  and  achieve efficiencies in production, and may therefore be unable to compete with more ‘mature’ competitor firms from abroad. The presence of 
infant industries is considered to be one of the strongest arguments in favour of trade protection policies in developing countries.  
Inferior good A good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases.  
Inflation A continuing (or sustained) increase in the general price level.  
Inflation  targeting  A  type  of  monetary  policy  carried  out  by  some  central  banks  that  focuses  on  achieving  a  particular  inflation  target,  rather  than  focusing on the goals of low and stable rate of inflation and low unemployment; 
common inflation targets are between 1.5% and 2.5%.  
Inflationary  gap  A  situation  where  real  GDP  is  greater  than  potential  GDP,  and  unemployment is lower than the natural rate of unemployment; it arises when the AD curve intersects the SRAS curve at a higher level of real GDP 
than potential GDP.  
Informal collusion See tacit collusion.  
Infrastructure  Numerous  types  of  physical  capital  resulting  from  investments,  making  major  contributions  to  economic  growth  and  development  by  lowering  costs  of  production  and  increasing  productivity;  include  power, 
telecommunications, piped water supplies, sanitation, roads, major dam and canal works for irrigation and drainage, urban transport, ports and airports.  
Injections In the circular flow of income model, refer to the entry into income flow of funds corresponding to investment, government spending or exports.  
Integration See economic integration.  
Interest (i) A payment, per unit of time, for the use of borrowed money (borrowers pay interest, lenders receive interest). (ii) A payment, per unit of time, to owners of capital resources.  
Interest rate Interest expressed as a percentage; in the case of borrowed money, it is interest as a percentage of the amount borrowed. Changes in interest rates form the basis of monetary policy.  
International  Monetary  Fund  (IMF)  An  international  financial  institution  composed  of  185  member countries, whose purpose is to make short-term loans to governments on commercial terms (i.e. non-concessional) in order to 
stabilise exchange rates, alleviate balance of payments difficulties and help countries meet their foreign debt obligations.  
Interventionist policy Any policy based on government intervention in the market; to be contrasted with market-oriented policy. See also government intervention.  
Interventionist  supply-side  policy  Any  policy  based  on  government  intervention  in  the  market intended to affect the supply-side of the economy, usually to shift the LRAS curve to the right, increase potential output and achieve 
long term economic growth; see industrial policy as an example. May be contrasted with market based supply side policy. 
Investment Includes spending by firms or the government on capital goods (i.e. buildings, machinery, equipment, etc.) and all spending on new construction (housing and other buildings).  
J-curve  effect  A  curve  that  plots  the  balance  of  trade (exports minus imports) on the vertical axis and time on the horizontal axis, showing that a country with a devaluing/depreciating currency may see a worsening in its trade balance (an increase in a trade deficit) in the 
period immediately following the devaluation or depreciation, while in a later period the trade deficit will begin to shrink provided the Marshall–Lerner condition holds (see Marshall–Lerner condition).  
Joint  supply  Refers  to  production  of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other (for example, butter and skimmed milk are both 
produced from whole milk, and producing more of one means producing more of the other as well).  
Keynesian aggregate supply curve An aggregate supply curve that has a flat (horizontal) section, and upward sloping section and a vertical section.  
Keynesian  multiplier  The  ratio  of  real  GDP  divided  by  a  change  in  any  of  the  components  of  aggregate  spending (consumption C, investment I, government spending G, or net exports X−M); alternatively it is 1/(1-MPC), where MPC is the marginal propensity to 
consume. The value of this ratio is usually greater than one because of a multiplied effect of an initial change in a component of aggregate spending on the final value of real output.  
Kinked demand curve A model developed to explain price inflexibility of oligopolistic firms that do not collude (do not agree to collaborate in order to limit competition between them).  
Labour A factor of production, which includes the physical and mental effort that people contribute to the production of goods and services.  
Labour  market  flexibility  Refers  to  the  operation  of  market  forces  (supply  and  demand)  in  the  labour  market;  to  be  contrasted  with  labour  market  rigidities.  May be achieved by reducing or eliminating interference with market 
forces (for example, reducing or eliminating minimum wages and labour union activities, reducing job security, etc.); see labour market reforms.  
Labour  market  reforms  Reforms  intended  to make labour markets more competitive and flexible, to make wages respond to the forces of supply and demand, to lower labour costs and increase employment by lowering the natural 
rate of unemployment; include abolishing or reducing minimum wages, reducing job security and reducing unemployment benefits. Are a type of supply-side policy.  
Labour  market  rigidities  Factors  preventing  the  forces  of  supply  and demand from operating in the labour market, and therefore preventing labour market flexibility; include minimum wage legislation, job security, etc. See labour 
market reforms.  
Land  A  factor  of  production  which  includes  all  natural  resources:  land  and  agricultural  land,  as  well  as  everything  that  is under or above the land, such as minerals, oil reserves, underground water, forests, rivers and lakes. Natural 
resources are also called ‘gifts of nature’ or ‘natural capital’.  
Law  of  demand  A  law  stating  that  there  is  a  negative causal relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus: as the price of the good increases, the quantity 
of the good demanded falls (and vice versa).  
Law  of  diminishing  returns  A  law  that states that as more and more units of a variable input (such as labour) are added to one or more fixed inputs (such as land), the marginal product of the variable input at first increases, but there comes a point when the marginal 
product of the variable input begins to decrease. This relationship presupposes that the fixed input(s) remain fixed, and that the technology of production is also fixed (unchanging).  

22 
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Master handout 

Law  of  supply  A  law  stating  that  there  is  a  positive  causal  relationship  between  the  price of a good and quantity of the good supplied, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of 
the good supplied also increases (and vice versa).  
Leakages In the circular flow of income model, refer to the withdrawal from the income flow of funds corresponding to savings, taxes or imports; also known as ‘withdrawals’.  
Long  run  (i)  In  microeconomics,  it  is a time period in which all inputs can be changed; there are no fixed inputs. (ii) In macroeconomics, it is the period of time when prices of resources (especially wages) change along with changes 
in the price level.  
Long-run  aggregate  supply  (LRAS)  curve  A  curve  showing the relationship between real GDP produced and the price level when wages (and other resource prices) change to reflect changes in the price level, ceteris paribus. The 
LRAS curve is vertical at the full employment level of GDP, or potential GDP, indicating that in the long run the economy produces potential GDP, which is independent of the price level.  
Long run average total costs The lowest possible average costs that can be attained by a firm for any level of output when all the firm's inputs are variable, i.e. in the long run.  
Long-run average total cost curve A curve that shows the lowest possible average cost that can be attained by a firm for any level of output when all of the firm's inputs are variable.  
Long-run  equilibrium  level  of  output  The  level  of  output  (real  GDP)  that  results  when the economy is in long run equilibrium, occurring when the aggregate demand and short-run aggregate supply curves intersect at a point on 
the long run aggregate supply curve; occurs where the vertical LRAS curve intersects the horizontal axis, known as potential output.  
Long-run Phillips curve See Phillips curve.  
Long  term  growth  trend  In  the  business  cycle  diagram,  refers  to  the  line  that  runs  through  the  business  cycle  curve,  representing  average  growth  over  long  periods  of  time;  shows  how  output  grows  over  time  when  cyclical 
fluctuations are ironed out. The output represented by the long-term growth trend is known as potential output.  
Lorenz  curve  A  curve  illustrating  the  degree  of  equality  (or  inequality)  of  income  distribution  in  an  economy.  It  plots  the cumulative percentage of income received by cumulative shares of the population. Perfect income equality 
would be represented by a straight line. The closer the Lorenz curve is to the straight line, the greater the equality in income distribution.  
Loss Refers to the difference between economic costs and total revenue of a firm when economic costs are greater than revenues; it is negative economic profit. See economic profit.  
Luxuries Goods that are not necessary or essential; they have a price elastic demand (PED>1) and income elastic demand (YED>1). To be contrasted with necessities.  
Macroeconomic  objectives  Objectives  of  policy  makers  in  the  macroeconomy;  include  full  employment,  low  rate  of  inflation,  economic  growth,  an  equitable  distribution  of  income  and  external  balance  (balance  of  trade  and 
avoidance of balance of payments problems).  
Macroeconomics  The  branch  of  economics  that  examines  the  economy  as  a  whole  by  use  of  aggregates,  which  are  wholes  or  collections  of  many  individual  units,  such  as  the  sum  of  consumer  behaviours  and the sum of firm 
behaviours, total income and output of the entire economy as well as total employment and the general price level.  
Managed  exchange  rates  Exchange  rates  that  are  for  the  most  part  free  to  float  to their market levels (i.e. their equilibrium levels) over long periods of time; however, central banks periodically intervene in order to stabilise them 
over the short term.  
Managed exchange rate system The exchange rate system in use since 1973, also known as the ‘managed float’; see managed exchange rates. managed float See managed exchange rates. 
Marginal benefit The extra or additional benefit received from consuming one more unit of a good.  
Marginal cost The extra or additional cost of producing one more unit of output.  
Marginal private benefits (MPB) The extra benefit received by consumers when they consume one more unit of a good.  
Marginal private costs (MPC) The extra costs to producers of producing one more unit of a good.  
Marginal product The extra or additional output that results from one additional unit of a variable input (such as labour).  
Marginal propensity to consume (MPC) The fraction of additional income spent on domestically produced goods and services. Determines the size of the Keynesian multiplier; the larger the MPC, the larger the multiplier.  
Marginal propensity to import (MPI) The fraction of additional income spent on imports. The larger the MPI, the smaller the Keynesian multiplier.  
Marginal propensity to save (MPS) The fraction of additional income that is saved. The larger the MPS, the smaller the Keynesian multiplier.  
Marginal propensity to tax (MPT) The fraction of additional income that is paid as taxes. The larger the MPT, the smaller the Keynesian multiplier.  
Marginal revenue The additional revenue arising from the sale of an additional unit of output.  
Marginal social benefits (MSB) The extra benefits to society of consuming one more unit of a good; are equal to marginal private benefits (MPB) when there are no consumption externalities.  
Marginal social costs (MSC) The extra costs to society of producing one more unit of a good; are equal to marginal private costs (MPC) when there are no production externalities.  
Marginal tax rate The tax rate paid on additional income; refers to the tax rate that applies to the highest tax bracket of an individual’s personal income.  
Market Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange.  
Market demand Refers to the sum of all individual consumer demands for a good or service.  
Market equilibrium Occurs where quantity demanded is equal to quantity supplied, and there is no tendency for the price or quantity to change.  
Market  failure  Occurs  when  the  market  fails  to  allocate  resources  efficiently,  or  to  provide  the  quantity  and  combination  of  goods  and  services mostly wanted by society. Market failure results in allocative inefficiency, where too 
much or too little of goods or services are produced and consumed from the point of view of what is socially most desirable.  
Market power Refers to the control that a seller may have over the price of the product it sells; the greater the market power, the greater is the seller’s control over price. Also known as ‘monopoly power’.  
Market structure The characteristics of a market organisation that determine the behaviour of firms within an industry.  
Market supply Refers to the sum of all individual firm supplies of a good or service.  

23 
Dr McCormick 
IB Economics 
Master handout 

Market-based  supply-side  policy  Any  policy  based  on  promoting  well  functioning,  competitive  markets  in  order to influence the supply-side of the economy, usually to shift the LRAS curve to the right, increase potential output 
and achieve long term economic growth; include labour market reforms, competition policies and incentive-related policies. May be contrasted with interventionist supply side policy.  
Market-oriented policy A policy in which government intervention is limited, economic decisions are made mainly by the private decision-makers (firms and consumers) and the market has significant freedom to determine resource 
allocation; to be contrasted with interventionist policy.  
Marshall–Lerner  condition  A condition stating when depreciation or devaluation of a country’s currency will lead to an improvement in that country’s balance of trade: the sum of the price elasticities of demand for imports and exports must be greater than 1 for the trade 
balance to improve (for a trade deficit to become smaller). This usually holds over the longer term, but not in the shorter term (see J-curve).  
Maximum price A legal price set by the government, which is below the market equilibrium price; this does not allow the price to rise to its equilibrium level determined by a free market; also known as a price ceiling.  
Merit goods Goods that are held to be desirable for consumers, but which are underprovided by the market. Reasons for under provision may be that the good has positive externalities, or consumers with low incomes cannot afford 
it (and so do not demand it), or consumer ignorance about the benefits of the good.  
Micro-credit  A  programme  to  provide  credit  (loans)  in  small  amounts  to  people  who  do not ordinarily have access to credit. ‘Micro’ is the Greek word for ‘small’, and refers to the small amounts of the loans, the very small size of 
businesses or activities that are financed by the loans (very small businesses are known as ‘micro-enterprises’) and the short repayment periods involved.  
Microeconomics  The  branch  of  economics  that  examines  the  behaviour  of  individual  decision-making  units,  consumers  and firms; is concerned with consumer and firm behaviour and how their interactions in markets determine 
prices in goods markets and resource markets.  
Millennium  Development  Goals  (MDGs)  Eight development goals adopted by the Millennium Declaration of 2000, consisting of 18 targets to be achieved by the year 2015; among the eight goals, four include eradicating extreme 
poverty and hunger, achieving universal primary education, reducing child mortality, promoting gender equality.  
Minimum price A legal price set by the government which is above the market equilibrium price; this does not allow the price to fall to its equilibrium level determined by a free market; also known as a price floor.  
Minimum  wage  A  minimum price of labour (the ‘wage’) set by governments in the labour market, in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services. It is 
a type of price floor.  
Monetarist/new  classical  model  Actually  includes  two  different  models  of  the  macroeconomy  (the  monetarist  and  the  new  classical);  both  are  based  on  the  following  principles:  the  importance  of  the  price  mechanism  in 
coordinating economic activities, the concept of competitive market equilibrium, and thinking about the economy as a harmonious system that automatically tends toward full employment.  
Monetary policy Policy carried out by the central bank, aiming to change interest rates in order to influence aggregate demand; it is a type of demand side policy, or demand management.  
Monetary  union  A  high  form  of  economic  integration,  involving  the  adoption  by  a  group  of  countries  of a single currency, such as some of the countries of the European Union (‘eurozone’ countries) that have adopted the euro. 
Monetary integration in addition involves the adoption of a common monetary policy carried out by a single central bank, which is necessitated by the use of a single currency.  
Money Anything that is acceptable as payment for goods and services; more precisely, money consists of currency (coins and paper money) and checking accounts.  
Monopolistic competition One of the four market structures, with the following characteristics: a large number of firms; substantial control over market price; product differentiation; no barriers to entry. Examples include the shoe, clothing, detergent, computer, publishing, 
furniture and restaurant industries. 
Monopoly  One  of  the  four  market  structures,  with  the  following  characteristics:  a  single  or  dominant  large  firm  in  the  industry; significant control over price; produces and sells a unique product with no close substitutes; high barriers to entry into the industry. Examples 
include telephone, water and electricity companies in areas where they operate as a single supplier.  
Monopoly power Occurs whenever a firm has the ability to control the price of the product it sells (also known as ‘market power’).  
Multilateral  development  assistance  Lending  to  developing  countries  for  the  purpose  of  assisting  their  development  on  non-concessional  terms  (market  rates  of interest and repayment periods) by multilateral organisations, i.e. 
organisations composed of many countries, including development banks such as the World Bank, and the International Monetary Fund; to be contrasted with foreign aid.  
Multilateral  trade  agreement  A  trade  agreement  (or  agreement  to lower international trade barriers) between many countries; at the present time these are mainly carried out within the framework of the World Trade Organization 
(WTO), and involve agreements between WTO member countries. May be contrasted with bilateral trade agreement and regional trade agreement.  
Multinational corporation (MNC) A firm involved in foreign direct investment (FDI); it is a firm that is based in one country (the home country) and that undertakes productive investments in another country (the host country).  
Multiplier See Keynesian multiplier.  
National income The total income of an economy, often used interchangeably with the value of aggregate output, particularly in the context of macroeconomic models (such as the AD-AS model).  
National income statistics Statistical data used to measure an economy’s national income and output as well as other measures of economic performance.  
Nationalisation A transfer in ownership of a firm away from the private sector and toward government ownership; a nationalised firm is a government-owned firm.  
Natural  capital  Refers  to  an  expanded  meaning  of  the  factor  of production land, including everything that is included in land plus additional natural resources occurring naturally in the environment such as the air, biodiversity, soil 
quality, the ozone layer and the global climate. Is considered to be a type of ‘capital’ because it provides a stream of future benefits as it is necessary for humankind’s ability to live, survive and produce in the future.  
Natural  monopoly  A  single  firm  (a  monopoly)  that  can  produce  for  the  entire  market  at  a  lower average cost than two or more smaller firms. This happens when the market demand for the monopolist’s product is within the range of falling long-run average cost, where 
there are economies of scale.  
Natural rate of unemployment Unemployment that occurs when the economy is producing at its potential or full employment level of output (real GDP), and is equal to the sum of structural, frictional plus seasonal unemployment.  
Necessities Goods that are necessary or essential: they have a price inelastic demand (PED<1) and income inelastic demand (YED<1). To be contrasted with luxuries.  
Negative  causal  relationship  A  relationship  between  two  variables  in  which  an  increase  in  the value of one causes a decrease in the value of the other, i.e. the two variables change in opposite directions; also known as an indirect 
relationship.  
Negative externality A type of externality where the side-effects on third parties are negative or harmful, also known as ‘spillover costs’. To be contrasted with positive externality; see also externality.  

24 
Dr McCormick 
IB Economics 
Master handout 

Negative  externality  of  consumption  A  negative  externality  caused  by  consumption  activities,  leading  to  a  situation  where  marginal  social  benefits  are  less  than  marginal  private  benefits  (MSB  <  MPB); see also externality and 
negative externality.  
Negative  externality  of  production  A  negative  externality  caused  by  production  activities,  leading  to  a  situation  where  marginal  social  costs  are greater than marginal private costs (MSC > MPC); see also externality and negative 
externality.  
Net exports Refers to the value of exports minus the value of imports.  
Nominal GDP Gross domestic product measured in terms of current (or nominal) prices, which are prices prevailing at the time of measurement. Does not account for changes in the price level; to be distinguished from real GDP.  
Nominal value Value that is in money terms, measured in terms of prices that prevail at the time of measurement, and that does not account for changes in the price level; to be distinguished from real values.  
Non-collusive oligopoly A type of oligopoly where firms do not make agreements among themselves (i.e. do not collude) in order to fix prices or collaborate in some way. See the kinked demand curve, one of the better-known models of non-collusive oligopoly.  
Non-excludable  A  characteristic  of  some  goods  where  it  is  not  possible  to  exclude  someone  from using a good, because it is not possible to charge a price; it is one of the two characteristics of public goods (to be contrasted with 
excludable). See also non-rivalrous.  
Non-governmental  organisations  (NGOs)  Non-profit  organisations  that  provide  a  very  wide  range  of  services  and  humanitarian  functions;  in  developing  countries they provide foreign aid, all of which takes the form of grants 
(there  are  no  loans  involved).  They  are  involved  with  an  enormous  range  of  activities,  including  emergency  assistance,  promotion  of  sustainable  development,  poverty  alleviation,  protection  of  child  health,  provision of technical 
assistance, and many more.  
Non-price competition Occurs when firms compete with each other on the basis of methods other than price (such as product differentiation, advertising and branding). Non-price competition occurs in oligopoly and monopolistic competition.  
Non-price  determinants  of  demand  The  variables  (other  than  price)  that  can  influence  demand,  and  that  determine  the  position  of  a  demand  curve;  a  change  in  any  determinant of demand causes a shift of the demand curve, 
which is referred to as a ‘change in demand’.  
Non-price  determinants  of  supply  The  variables  (other  than  price)  that  can  influence  supply,  and  that  determine  the  position  of  a  supply  curve;  a change in any determinant of supply causes a shift of the supply curve, which is 
referred to as a ‘change in supply’.  
Non-price  rationing  The  apportioning  or  distributing  of  goods  among  interested  users/buyers  through  means  other  than price, often necessary when there are price ceilings (maximum prices); may include waiting in line (queues) 
and underground markets; to be contrasted with ‘price rationing’, which involves distributing goods among users by means of market determined prices.  
Non-produced, non-financial assets A part of the capital account of the balance of payments, which includes a variety of items such as mineral rights, forestry rights, fishing rights and airspace.  
Non-rivalrous  A  characteristic  of  some  goods  where  the  consumption  of  the good by one person does not reduce consumption by someone else; it is one of the two characteristics of public goods (to be contrasted with rivalrous). 
See also nonexcludable.  
Normal good A good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases.  
Normal profit The minimum amount of revenue that a firm must receive so that it keeps the business running (as opposed to shutting down); also defined as the amount of revenue needed to cover implicit costs, including entrepreneurship. (This presupposes that total revenue 
is also enough to cover explicit costs.) Normal profit is included among the economic costs of the firm, and is earned when economic profit is zero.  
Normative  economics  The  body  of  economics based on normative statements, which involve beliefs, or value judgements about what ought to be. Normative statements cannot be true or false; they can only be assessed relative to 
beliefs and value judgements. Normative economics forms the basis of economic policies; to be contrasted with positive economics. 
Official  Development  Assistance  (ODA)  The  most  important  part  of  foreign  aid,  referring  to  foreign  aid  that  is  offered  by  countries or by international organisations composed of a number of countries (it does not include aid 
offered by non-governmental organisations).  
Oligopoly  One  of  the  four  market  structures,  with  the  following  characteristics:  small  number  of  large  firms  in  the  industry;  firms  have significant control over price; firms are interdependent; products may be differentiated or homogeneous; there are high barriers to entry. 
Examples include the car industry, airlines, electrical appliances (differentiated products) and the steel, aluminium, copper, cement industries (homogeneous products).  
Open collusion See formal collusion.  
Open  economy  An  economy  that  has  international  trade:  (imports  and  exports)  usually  appears  in  connection  with economic theories and models as virtually all economies in the real world are open economies (though to varying 
degrees). To be contrasted with closed economy.  
Opportunity cost The value of the next best alternative that must be given up or sacrificed in order to obtain something else.  
Output  approach  A  method  used  to  measure  the  value  of  aggregate  output  of  an economy, which calculates the value of all final goods and services produced in the country within a given time period. As suggested by the circular 
flow model, it is equivalent to measurement by the expenditure approach and the income approach.  
Overallocation of resources Occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in its overproduction.  
Overvalued  currency  A  currency  whose  value  is  higher  than  its  free-market  value;  may  occur  if  the exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely floating exchange rate system. To be 
contrasted with undervalued currency.  
Parallel market See underground market.  
Per capita Per person, or per head. For example, GDP per capita is total GDP divided by the number of people in the population.  
Perfect  competition  One  of  the  four  market  structures,  with  the  following  characteristics:  a  large  number  of  small  firms;  no  control  over price; all firms sell a homogeneous product; no barriers to entry, perfect information and perfect resource mobility. Examples include 
agricultural commodity markets and the foreign exchange market.  
Perfectly elastic demand Refers to a price elasticity of demand value of infinity, and arises in the case of a horizontal demand curve; see price elasticity of demand.  
Perfectly elastic supply Refers to a price elasticity of supply value of infinity, and arises in the case of a horizontal supply curve; see price elasticity of supply.  

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Master handout 

Perfectly inelastic demand Refers to a price elasticity of demand value of zero, and arises in the case of a vertical demand curve; see price elasticity of demand.  
Perfectly inelastic supply Refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve; see price elasticity of supply.  
Personal  income  taxes  Taxes  paid  by  households  or  individuals  in  households  on  all  forms  of  income, including wages, rental income, interest income, and dividends (income from ownership of shares in a company); is the most 
important source of government tax revenues in many countries (especially economically more developed countries).  
Phillips curve A curve showing the relationship between unemployment and inflation. The short-run Phillips curve shows a negative relationship between the rate of inflation and the unemployment rate (as the rate of inflation increases, unemployment falls) suggesting that in 
the  short  run  policy-makers  can  choose  between the competing alternatives of low inflation or low unemployment by selecting appropriate demand-side policies. The long-run Phillips curve is a vertical line at the natural rate of unemployment, indicating that there is no negative 
relationship  between  inflation and unemployment, and suggesting that policy-makers do not have a choice between the two competing alternatives. In the long run, the only impact of an increase in aggregate demand is to increase the rate of inflation, while the level of real output 
is unaffected and the unemployment rate remains unchanged at the natural rate of unemployment.  
Physical  capital  One  of  the  factors  of  production,  which  is  itself  produced  (it  doesn’t  occur  naturally),  used  to  produce  goods  and  services;  includes  machinery, tools, factories, buildings, road systems, airports, telephone supply 
lines, etc. Also referred to as ‘capital’, or ‘capital good’ or ‘investment good’.  
Portfolio  investment  Financial  investment,  including  investment  in  stocks  and  bonds.  Appears  as  an  item  in  the  financial  account  of  the  balance  of  payments.  positive  causal  relationship  A  relationship between two variables in 
which an increase in the value of one causes an increase in the value of the other, i.e. the two variables change in the same direction; also known as a direct relationship.  
Positive  economics  The  body  of  economics  based  on  positive  statements,  which  are  about  things  that  are,  were  or  will  be.  Positive  statements  may  be  true or false. They form the basis of theories and models that try to explain 
economic events. To be contrasted with normative economics.  
Positive externality A type of externality where the side-effects on third parties are positive or beneficial, also known as ‘spillover benefits’; to be contrasted with negative externality; see also externality.  
Positive  externality  of  consumption  A  positive  externality  caused  by  consumption  activities,  leading  to  a  situation  where  marginal  social  benefits  are  greater  than marginal private benefits (MSB > MPB); see also externality and 
positive externality.  
Positive  externality  of  production  A  positive  externality  caused  by  production  activities,  leading  to  a  situation  where  marginal  social  costs  are  less  than  marginal  private  costs  (MSC<  MPC);  see  also  externality  and  positive 
externality.  
Potential  output  (potential  GDP)  The  level  of  output  (real  GDP)  that  can  be  produced  when  there  is  ‘full  employment’,  meaning  that  unemployment  is  equal  to  the  natural  rate  of  unemployment;  also  known  as  the  full 
employment level of output.  
Poverty The inability of an individual or family to afford an adequate standard of goods and services; this standard may be absolute or relative; see absolute poverty and relative poverty.  
Poverty  cycle  (poverty  trap)  Arises  when  low  incomes  result in low (or zero) savings, permitting only low (or zero) investments in physical, human and natural capital, and therefore low productivity of labour and of land, which in 
turn  gives  rise  to  low,  if  any,  growth  in  income  (sometimes  growth  may  be  negative), and hence low incomes once again. A poverty cycle may occur in a family, a community, a part of an economy, or in an economy as a whole. An 
important feature of the poverty cycle is that poverty is transmitted from generation to generation.  
Preferential  trade  agreement  An  agreement  between  two  or  more  countries  to  lower  trade  barriers  between  them  on  particular  products,  resulting  in  easier  access  to  the  markets  of  other  members  for  the  selected  products, 
compared with the access of countries that are not members.  
Price  ceiling  A  maximum  price  set  by  the  government  for  a  particular  good,  meaning  that  the price that can be legally charged by the sellers of the good cannot be higher than the legal maximum price. Results in a shortage of the 
product.  
Price competition Occurs when a firm lowers its price to attract customers away from rival firms, thus increasing sales at the expense of other firms. May occur in the case of monopolistic competition or oligopoly, but not in perfect competition (or monopoly).  
Price  control  Setting  of  minimum  or  maximum prices by the government (or private organisations) so that prices are unable to adjust to their equilibrium level determined by demand and supply. Price controls result in shortages or 
surpluses.  
Price deflator A price index used to calculate real GDP from nominal GDP; better known as the ‘GDP deflator’. 
Price discrimination The practice of charging a different price for the same product when the price difference is not justified by differences in costs of production.  
Price elastic demand Relatively high responsiveness of demand to changes in price; PED (price elasticity of demand) > 1. See price elasticity of demand.  
Price elastic supply Relatively high responsiveness of supply to changes in price; PES (price elasticity of supply) > 1. See price elasticity of supply.  
Price  elasticity  of  demand  (PED)  A  measure  of  the  responsiveness  of  the  quantity  of  a  good  demanded to changes in its price, given by the percentage change in quantity demanded divided by the percentage change in price. In 
general, if there is a large responsiveness of quantity demanded (PED > 1), demand is referred to as being elastic; if there is a small responsiveness (PED < 1), demand is inelastic.  
Price  elasticity  of  supply  (PES)  A  measure  of  the responsiveness of the quantity of a good supplied to changes in its price, given by the percentage change in quantity supplied divided by the percentage change in price. In general, 
if there is a large responsiveness of quantity supplied (PES > 1), supply is referred to as being elastic; if there is a small responsiveness (PES < 1), supply is inelastic.  
Price  floor  A  minimum  price  set  by  the  government  for  a  particular  good,  meaning  that  the  price  that  can  be  legally  charged  by  the  sellers  of  the  good  cannot  be  lower  than  the  legal  minimum  price.  Results in a surplus of the 
product.  
Price inelastic demand Relatively low responsiveness of demand to changes in price; PED (price elasticity of demand) < 1. See price elasticity of demand.  
Price inelastic supply Relatively low responsiveness of supply to changes in price; PES (price elasticity of supply) < 1. See price elasticity supply.  
Price  leadership  A  type  of  tacit  (or  informal)  collusion  among  oligopolistic  firms,  where  a  dominant  firm  in  the  industry  (which  may  be  the  largest, or the one with lowest costs) sets a price and also initiates any price changes; the remaining firms in the industry become 
price-takers, accepting the price that has been established by the leader. Under price leadership price changes tend to be infrequent, and are undertaken by the leader only when major demand or cost changes occur.  
Price support Minimum prices (or price floors) set by the government for agricultural products; see minimum price.  

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Master handout 

Price  taker  A  firm  that  accepts  a  price  at  which  it  sells  its  product.  Usually  refers  to  firms  in  perfect  competition,  which  being  small  and  numerous  have  no  control over price, and therefore accept the price determined in the market; may also be used to refer to firms in 
oligopoly that practice tacit collusion and accept a price set by a price leader (see price leadership).  
Price war Competitive price-cutting by firms; usually in oligopoly. As each one tries to capture market shares from rival firms; results in lower profits for firms.  
Prices  as  incentives  The  ability  of  prices,  and  changes  in  prices,  to  convey  information  to  consumers  and  producers  that  motivates  them  to respond by offering them incentives to behave in their best-self-interest; compare with 
prices as signals, which together with prices as incentives lead to an efficient allocation of resources (assuming no market failures).  
Prices as signals The ability of prices, and changes in prices, to communicate information to consumers and producers, on the basis of which they make economic decisions.  
Primary commodity Any product that is produced in the primary sector, which includes agriculture, forestry, fishing and the extractive industries; also known as ‘commodity’.  
Primary products All products produced in the primary sector of an economy; also known as commodities; see primary sector.  
Primary sector A part of an economy that is dominated by agriculture, also including fishing, forestry and all extractive activities (such as mining).  
Prisoner’s  dilemma  A  problem  in  game  theory showing that in some situations, although it is in the best interests of decision-makers to co-operate, when each actor acts in his/her best interests there results an outcome where they are all worse off. Is often used to illustrate 
the strategic interdependence of oligopolistic firms.  
Private good A good that is both rivalrous and excludable. To be contrasted with public good.  
Privatisation A transfer of ownership from the public sector (the government) to the private sector, i.e. private owners.  
Producer  price  index  (PPI)  Consists  of  several  indices  of  prices  received  by  producers  of  goods  at  various  stages  in  the  production  process  (such  as  a  PPI  for  inputs,  a  PPI  for  intermediate  goods,  and  a  PPI for final goods); 
considered to be predictors of changes in the consumer price index (CPI) because they measure price changes at an earlier stage in the production process.  
Producer  surplus Refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good. In a diagram, it is shown as the area under the price received by 
producers and above the supply curve.  
Product  differentiation  Occurs  when  each  firm  in  an  industry  tries  to  make  its  product  different from those of its competitors; usually in order to create some monopoly power; products can be differentiated by physical differences, quality differences, location, services, and 
product image.  
Production  possibilities  All  possible  combinations  of  the  maximum amounts of two goods that can produced by an economy, given fixed and unchanging resources and technology, when there is full employment of resources and 
productive efficiency.  
Production possibilities curve (PPC) A curve showing production possibilities.  
Production possibilities frontier (PPF) See production possibilities curve.  
Productive  efficiency  Occurs  when  firms  produce  at  the lowest possible cost; is one of the conditions for producing on the production possibilities curve (PPC). The condition for productive efficiency is that production takes place where ATC 
is minimum.  
Productivity  Refers  to  the  quantity  of  output  produced  for  each  hour  of  work  of  the  working  population;  for  an  economy  as  a  whole  it  can  be  measured  as  real  GDP  divided  by  the  total number of hours worked. Increases in 
productivity are a major factor leading to economic growth.  
Profit A payment, per unit of time, to owners of entrepreneurship/management (a factor of production). See economic profit and normal profit.  
Profit  maximisation  The goal of firms, according to the standard theory of the firm. It involves making profit as large as possible, and is achieved by producing the level of output where the difference between total revenue and total costs is the largest, or where marginal cost 
is equal to marginal revenue.  
Programme aid Foreign aid involving financial support to sectors, such as education, health care, agriculture, urban development, the financial sector (credit, banking, insurance), the environment, or others.  
Progressive taxation Taxation where, as income increases, the fraction of income paid as taxes increases; there is an increasing tax rate.  
Project aid Foreign aid involving support for specific projects, such as building schools, clinics, hospitals, irrigation systems, other agricultural infrastructure, or others.  
Proportional taxation Taxation where, as income increases, the fraction of income paid as taxes remains constant; there is a constant tax rate.  
Protection of trade See trade protection.  
Public debt Refers to the government’s accumulation of budget deficits minus budget surpluses; is the total amount owed by the government to all creditors (lenders); also known as ‘government debt’.  
Public  good  A  good  that  is  non-rivalrous  (its  consumption  by  one  person  does  not  reduce consumption by someone else) and non-excludable (it is not possible to exclude someone from using the good). Since it is not possible to 
exclude someone from using the good even though they do not pay for it, firms do not have an incentive to produce it. Public goods are therefore provided by the government. This is a type of market failure.  
Purchasing  power  parity  (PPP)  exchange  rates  Special  exchange  rates  between  currencies  that  makes  the  buying  power  of  each  currency  equal  to  the  buying  power of US$1, and therefore equal to each other. The use of PPP 
exchange rates to convert GDP (or GNI or any other output or income variable) eliminates the influence of price level differences across countries and is very important for making cross country comparisons. 
Quintiles Division of a population into five equal groups with respect to the distribution of a variable, such as income; for example, the lowest income quintile refers to 20% of the population with the lowest income.  
Quota A type of trade protection that involves setting a legal limit to the quantity of a good that can be imported over a particular time period (typically a year). (More generally, a ‘quota’ is a limited or fixed number of things.)  
Rate of interest See interest rate.  
Rational  economic  decision  making  The  assumption  in  economics  that  all  economic  decision-makers  act  in  their  best  self-interest,  trying  to  maximise  the  satisfaction  or  benefit  they  receive from their economic decisions; for 
example consumers try to maximise the satisfaction of consumption, firms maximise profit, workers try to secure the highest wage possible, etc.  
Real  GDP  Gross  domestic  product  (GDP)  measured  in  constant  prices,  i.e.  prices  that  prevail  in  one  particular  year,  called  a  ‘base  year’;  this  is  useful  for  making  comparisons  of  changes  in  GDP  over time that have taken into 
account the influence of changing prices.  

27 
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IB Economics 
Master handout 

Real value Value that has eliminated the influence of changes in the price level.  
Reallocation of resources Refers to reassigning resources to particular uses, so that the allocation of resources changes and becomes a new allocation.  
Recession An economic contraction, where there is falling real GDP (negative growth) and increasing unemployment of resources which last six months or more.  
Recessionary  gap  A  situation  where  real  GDP  is  less  than  potential  GDP,  and  unemployment  is  greater  than  the natural rate of unemployment; it arises when the AD curve intersects the SRAS curve at a lower level of real GDP 
than potential GDP. Also known as ‘deflationary gap’.  
Redistribution of income Refers to changing the distribution of income, giving rise to a new distribution.  
Regional  trade  agreement  A  trade  agreement  (or  agreement  to  lower  international  trade  barriers)  between  several  countries  that  are  located  within  a  geographical  region  (such  as  NAFTA,  or  North  American  Free  Trade 
Agreement). May be contrasted with bilateral trade agreement and multilateral trade agreement.  
Regressive taxation Taxation where, as income increases, the fraction of income paid as taxes decreases; there is a decreasing tax rate.  
Relative  poverty  The  inability  of  an  individual  or  a  family  to  afford  an adequate standard of goods and services, where the adequate standard is relative and changes over time; this standard is defined as what is ‘typical’ in a society, 
taken to be a particular percentage (often 50%) of society’s median income. As incomes increase and the median income rises, the standard also rises.  
Rent A payment, per unit of time, to owners of land resources who supply their land to the production process.  
Reserve  assets  Refers  to  foreign  currency  reserves  that  the  central  bank  maintains  and  can  buy  or  sell  to  influence  the  value  of  the  country’s  currency  exchange rate; in the balance of payments appears as an item in the financial 
account. Also known as ‘official reserves’.  
Resources Factors of production, used by firms as inputs in the production process; see factors of production.  
Resource  allocation  Assigning  available  resources,  or  factors  or  production,  to specific uses chosen among many possible and competing alternatives; involves answering the ‘what to produce’ and ‘how to produce’ basic economic 
questions.  
Returns to scale Refers to the relationship between inputs and output, and in particular by how much output changes if all inputs change (increase or decrease) by the same proportion; see constant, increasing and decreasing returns to scale.  
Revaluation  (of  a  currency)  Refers  to  an  increase  in  the  value  of  a  currency in the context of a fixed exchange rate system (compare with appreciation, which is an increase in currency value in the contest of a floating or managed 
exchange rate system).  
Revenue  maximisation  The  objective  of  some  firms  to  maximise  revenue  (rather  than  profit,  as  assumed  by  the  standard  theory  of  the  firm).  The  revenue  maximizing firm produces the level of output where its marginal revenue is equal to zero (as that is where total 
revenue is maximum).  
Rivalrous A characteristic of a good according to which its consumption by one person reduces its availability for someone else; most goods are rivalrous. It is one of the two characteristics of ‘private goods’. See also excludable.  
Satisficing  A  goal  of  firms  to  achieve  satisfactory  results,  rather  than  pursue  a  single  maximising objective, such as to maximise profits or revenues; based on the argument that large, modern firms have numerous objectives which may partly overlap or conflict, thus forcing 
them to compromise and reconcile conflicts, rather than pursue optimal results.  
Scarcity The condition in which available resources (land, labour, capital, entrepreneurship) are limited; they are not enough to produce everything that human beings need and want.  
Seasonal unemployment A type of unemployment that occurs when the demand for labour in certain industries changes on a seasonal basis because of variations in needs; for example, farm workers are hired during peak harvesting 
seasons and let off for the rest of the year.  
Short run (i) In microeconomics, it is a time period during which at least one input is fixed and cannot be changed by the firm. (ii) In macroeconomics, it is the period of time during which the prices of resources, particularly the price of labour (wages) 
do not change (they are constant).  
Short-run aggregate supply (SRAS) curve A curve showing the relationship between the price level and the quantity of real GDP produced by firms when resource prices do not change.  
Short-run  equilibrium  level  of  output  In  the  monetarist/new  classical  model,  it  is  the  level  of  output  (real  GDP)  determined  by  the  intersection  of the aggregate demand and short run aggregate supply curves; in the Keynesian 
model,  it  is  the  level  of  output  determined  by  the  intersection  of  the  aggregate  demand  and  Keynesian  aggregate  supply  curves.  In  both  models,  equilibrium  may  occur  where  there  is  (i)  a  recessionary  (deflationary)  gap,  (ii)  an 
inflationary gap, or (iii) full employment output.  
Short-run Phillips curve See Phillips curve.  
Shortage In the context of demand and supply, is the amount by which quantity demanded is greater than quantity supplied.  
Shut-down  price  The  price  at  which  a  firm  that  is  making  losses  and will stop producing in the short run. In perfect competition, it is given by price = minimum average variable cost. (If price is greater than average variable cost, the firm will go on producing in the short 
run even if it is making a loss.)  
Slope  In  the  case  of a straight line, refers to the change in the dependent variable divided by the change in the independent variable between any two points on the line. According to mathematical convention, where the dependent variable is plotted on the vertical axis, the slope 
is the ‘rise over run’ (i.e. the vertical change divided by the horizontal change), however in microeconomics where quantity, the dependent variable, is plotted on the horizontal axis, the slope is the ‘run over rise’ (the horizontal change divided by the vertical change).  
Social  optimum  Refers  to  a  situation  that  is  the  best  from  the  social  point  of  view,  determined by the achievement of allocative efficiency (or economic efficiency); occurs when marginal social benefits are equal to marginal social 
costs (MSB=MSC).  
Social safety net A system of government transfers of cash or goods to vulnerable groups, undertaken to ensure that these groups do not fall below a socially acceptable minimum standard of living; see also transfer payments.  
Social  sciences  Academic  disciplines  that  study  human  society  and  social  relationships,  concerned  with discovering general principles describing how societies function and are organised; include anthropology, economics, political 
science, psychology, sociology and others. 
Social  scientific  method  The  same  as  the  scientific  method,  it  is  a  method  of  investigation  used  in  sciences  and social sciences allowing the accumulation of scientific and social scientific knowledge; involves making a hypothesis 
based on observations, testing the hypothesis, and rejecting or accepting the hypothesis based on empirical (real-world) evidence.  

28 
Dr McCormick 
IB Economics 
Master handout 

Social surplus The sum of consumer and producer surplus; it is maximum in a competitive market with no market failures. See consumer surplus and producer surplus.  
Social welfare See welfare.  
Spare capacity Refers to physical capital that firms have available but do not use; arises in a recession when there is unemployment of resources.  
Specialisation  Occurs  when  a  firm  or  a  country  concentrates  production  on  one  or a few goods and services. In international trade theory, specialisation forms the basis for the gains from trade, arising when countries specialise according to their comparative advantage, and 
when firms specialise in production of goods and services that offer them economies of scale. Specialisation of labour occurs when workers perform one or a few tasks, and is one factor leading to economies of scale.  
Specific tax A tax calculated as an absolute amount per unit of the good or service sold.  
Speculation  (currency)  Buying  and  selling  of  something  in  the  hope  of  making  a  profit. ‘Currency speculation’ involves buying and selling currencies based on expectations of changes in the value of a currency (exchange rates) in 
order to make a profit in the future.  
Stagflation Arising from a combination of the works ‘stagnation’ and ‘inflation’, refers to the simultaneous appearance of inflation and recession (and therefore also unemployment).  
Strategic  interdependence  Characteristic  of  oligopolies,  refers  to  the  mutual  interdependence  of  firms  and  their  strategic  behaviour  (planning their actions based on guesses about what their rivals will do), in view of the expectation that what happens to the profits of one 
firm depends on the strategies adopted by the other firms.  
Structural  unemployment  A  type  of  unemployment  that  occurs as a result of technological changes and changing patterns of demand (causing changes in demand for labour skills), as well as changes in the geographical location of 
jobs, and labour market rigidities.  
Subsidy  An  amount of money paid by the government to firms for a variety of reasons: to prevent an industry from failing, to support producers’ incomes, or as a form of protection against imports (due to the lower costs and lower 
prices that arise from the subsidy). A subsidy given to a firm results in a higher level of output and lower price for consumers. May also be paid to consumers as financial assistance or for income redistribution.  
Substitute goods Two or more goods that satisfy a similar need, so that one good can be used in place of another. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.  
Supernormal profit Refers to positive economic profit, arising when total revenue is greater than total economic costs (implicit plus explicit costs); is also known as ‘abnormal profit’. See economic profit.  
Supply Indicates the various quantities of a good that firms (or a firm) are willing and able to produce and sell at different possible prices during a particular time period, ceteris paribus.  
Supply curve A curve showing the relationship between the quantities of a good that firms (or a firm) are willing and able to produce and sell during a particular time period and their respective prices, ceteris paribus.  
Supply  of  money  The  amount  of  money  in  circulation,  determined  by  the  central bank of a country; in combination with the demand for money, the supply of money determines the equilibrium rate of interest. (In practice central 
banks have difficulties in accurately controlling the supply of money.) 
Supply  shock  Events  that  have  a  sudden  and  strong  impact  on  short-run  aggregate  supply  (SRAS),  leading  to  SRAS  curve  shifts;  for  example,  a  war  or  violent  conflict  that  destroys  physical  capital  and  disrupts  the  economy, 
favourable or unfavourable weather conditions, etc.  
Supply-side  policies  A  variety  of  policies that focus on aggregate supply, namely factors aiming to shift the long-run aggregate supply (LRAS) curve to the right, in order to achieve long-term economic growth. They do not attempt 
to stabilise the economy (i.e. to reduce the severity of the business cycle). There are two major categories of supply-side policies: market-based and interventionist. To be contrasted with demand-side policies.  
Surplus  In  general,  this  is  the  excess  of  something  over  something  else  to  which  it  is  being  compared.  (i)  In  the  context  of  demand  and  supply,  it  is  the  extra  supply  that  results  when  quantity  supplied  is  greater  than  quantity 
demanded.  (ii)  In  the case of consumer and producer surplus, it is the extra benefit consumers get by paying less for a good than the amount they are willing to pay, or the extra benefit producers get by receiving a higher price for the 
good  they  are  selling  than  the  price  they  are  willing  to  receive.  (iii)  In  the  case  of  the  government  budget,  a  surplus  occurs  when  government  revenues  are  greater than government expenditures. (iv) In the balance of payments, a 
surplus in an account occurs when the credits (inflows of money from abroad) are larger than the debits (outflows of money to other countries).  
Sustainability  Refers to maintaining the ability of the environment and the economy to continue to produce and satisfy needs and wants into the future; depends crucially on the preservation of the environment over time. Related to 
the  concept  of  sustainable  development,  meaning  ‘Development  which  meets  the  needs  of  the  present  without  compromising  the  ability  of  future  generations  to  meet their own needs’ (according to the Brundtland Commission), 
which is the idea that the use of natural resources in the present should not leave behind fewer or lower quality resources for use by future generations.  
Tacit  collusion  Refers  to  cooperation  that  is  implicit  or  understood  between  cooperating  oligopolistic  firms,  without  a  formal agreement, with the objectives to coordinate prices, avoid competitive price-cutting, limit competition, reduce uncertainties and increase profits; may 
take the form of price leadership.  
Tariffs  Taxes  on  imported  goods;  they  are  the  most  common  form  of  trade  restriction.  Tariffs  may  serve  two  purposes:  to  protect  a  domestic  industry  from  foreign  competition  (a  protective  tariff);  or  to  raise  revenue  for  the 
government (a revenue tariff). Whatever the purpose, the impacts on the economy are the same.  
Tax incidence Refers to the burden of a tax, or those who are the ultimate payers of the tax.  
Technical efficiency See productive efficiency.  
Terms  of  trade  Relates  the  prices  a  country  receives  for  its  exports  to  the  prices  paid  for  its  imports,  and  is  given  by  the  ratio  of  index  of  average export prices to index of average import prices times 100. An increase in the value of this ratio indicates a terms of trade 
improvement, meaning that a country can now buy more imports for the same amount of exports; a decrease in the value of this ratio indicates a terms of trade deterioration, meaning that a country can now buy fewer imports for the same amount of exports.  
Theory  of  absolute  advantage  According  to  this  theory,  if  countries  specialise  in  and  export  the  goods  in  which  they  have  an  absolute  advantage  (can  produce  with  fewer  resources),  there  results  an  improvement  in  resource  allocation  and  increased  production and 
consumption in each country.  
Theory  of  comparative  advantage  According  to  this  theory  (also  known  as a law), as long as opportunity costs in two (or more) countries differ, it is possible for all countries to gain from specialisation and trade according to their comparative advantage; this results in 
an improvement in the global allocation of resources, resulting in greater global output and consumption. Is a more powerful explanation of the gains from trade than the theory of absolute advantage. 
Third  degree  price  discrimination  Occurs  when  a  firm  price  discriminates  (i.e. changes different prices that are not justified by difference in costs) among different consumer groups; is based on the principle that different consumer groups have different price elasticities of 
demand (PED) for a product, so that higher prices are charged to consumers with a lower PED and lower prices to consumers with a higher PED.  

29 
Dr McCormick 
IB Economics 
Master handout 

Tied  aid  The  practice  whereby  donors  make  the  recipients  of  foreign  aid  spend  a  portion  of  the  borrowed  funds  on  the  purchase  of  goods  and  services  from  the  donor  country.  It  occurs  only  in  the  context  of  bilateral  (not 
multilateral) aid.  
Tight monetary policy See contractionary monetary policy.  
Total costs The sum of fixed and variable costs.  
Total product The total quantity of output produced by a firm.  
Total revenue The amount of money received by firms when they sell a good (or service); it is equal to the price (P) of the good times the quantity (Q) of the good sold. Therefore total revenue = P×Q.  
Tradable  permits Permits that can be issued to firms by a government or an international body, and that can be traded (bought and sold) in a market, the objective being to limit the total amount of pollutants emitted by the firms. If 
a  firm  can  produce  its  product  by  emitting  a  lower  level  of pollutants than the level set by its permits, it can sell its extra permits in the market. If a firm needs to emit more pollutants than the level set by its permits, it can buy more 
permits in the market. Tradable permits are part of cap-and-trade schemes.  
Trade creation The replacement of higher cost products (imported or domestically produced) by lower cost imports that results when a trading bloc is formed and trade barriers are removed. (To be contrasted with trade diversion.)  
Trade diversion The replacement of lower cost products (imported or domestically produced) by higher cost imports that results when a trading bloc is formed and trade barriers are removed. (To be contrasted with trade creation.)  
Trade liberalisation The policy of liberalising (freeing up) international trade by eliminating trade protection and barriers to trade (i.e. tariffs, quotas, etc.)  
Trade  protection  Government  intervention  in  international  trade  through  the  imposition  of  trade  restrictions  (or  barriers)  to  prevent  the  free  entry  of  imports  into  a  country  and  protect  the  domestic  economy  from  foreign 
competition.  
Trading  bloc  A  group  of  countries  that  have agreed to reduce tariff and other barriers to trade for the purpose of encouraging the development of free or freer trade and cooperation between them. See also free trade area, customs 
union and common market.  
Transfer  payments  Payments  made  by  the  government  to  individuals  specifically  for  the  purpose  of  redistributing  income,  thus  transferring  income  from  those who work and pay taxes towards those who cannot work and need 
assistance. Groups receiving transfer payments may include older people, sick people, very poor people, children of poor families, unemployed people and others; in their entirety they are referred to as ‘vulnerable groups’.  
Underallocation of resources Occurs when too few resources are allocated to the production of a good relative to what is socially most desirable, resulting in its underproduction.  
Underemployment  The  number of underemployed people, defined as all people above a particular age (i.e. not children) who have part-time jobs when they would prefer to have full-time jobs; or have jobs that do not make full use 
of their skills and education.  
Underground  market  Refers  to  a  market  that arises whenever a buying/selling transaction is unrecorded; may involve legal goods and services (such as plumbing done by a plumber who does not report the income) or illegal goods 
and services (such as drugs). May also arise due to the imposition of price ceilings leading to shortages. Also known as ‘parallel market’.  
Undervalued  currency  A  currency  whose  value  is  lower  than  its  free-market  value;  may occur if the exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely floating exchange rate system. To be 
contrasted with overvalued currency.  
Unemployment The number of unemployed people, defined as all people above a particular age (i.e. not children) who are not working and who are actively looking for a job.  
Unemployment  rate  A  measure  of  the  amount  of  unemployment  in  an  economy,  expressed  as  a  percentage,  calculated  by  taking  the  total  number  of  unemployed  people  in  an  economy  and  dividing  by  the  labour  force,  and 
multiplying by 100.  
Unit elastic demand Refers to a price elasticity of demand value of one; see price elasticity of demand.  
Unit elastic supply Refers to a price elasticity of supply value of one; see price elasticity of supply.  
Urban  informal  sector  That  part  of  an  urban  economy  that  lies  outside  the  formal  economy,  consisting  of  economic  activities  that  are  unregistered and legally unregulated. In developing countries these activities are often a very 
large part of the urban economy; unlike in developed countries, where they are usually pursued to avoid taxes and labour laws, in developing countries they are a matter of physical survival of substantial portions of the population.  
Value of output flow In the circular flow of income model, refers to the value of output that is sold by firms and purchased by consumers, which is equal to the expenditure fl ow and the income flow.  
Variable costs Costs that arise from the use of variable inputs, and that vary or change as output increases or decreases (hence they are ‘variable’). An example of a variable cost is wages, or the payment for labour resources (a variable input).  
Wage A payment, per unit of time, to those who provide labour; this includes all wages and salaries, as well as supplements (such as bonuses and commissions).  
Weighted  price  index  A  measure  of  average  prices  in  one  period  relative  to average prices in a reference period called a base period; a weighted price index is a price index that ‘weights’ the various goods and services according to their relative importance. In the consumer 
price index (CPI), goods and services are weighted according to their relative importance in consumer spending.  
Welfare  In  general,  refers  to  the  wellbeing  of  a  population.  In  microeconomics,  it  is  measured  by  the  amount  of social surplus (consumer and producer surplus) that is generated in a market. Welfare is greatest, i.e. social surplus is 
greatest, in competitive market equilibrium when there are no externalities, and marginal social benefits are equal to marginal social costs (MSB=MSC).  
Welfare loss Refers to loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal social costs (MSB≠MSC), due to market failure.  
Withdrawals See leakages.  
World  Bank  A  development  assistance  organisation,  composed  of  185 member countries which are its joint owners, that extends long-term credit (loans) to developing country governments for the purpose of promoting economic 
development  and  structural  change.  It  consists  of  two  organisations:  the  International  Bank  for  Reconstruction  and  Development  (IBRD),  which  lends  to  middle  income  countries  on  non  concessional  (i.e.  commercial)  terms 
(therefore  its  activities  and  lending  do  not  form  part  of  foreign  aid); and the International Development Association (IDA), which has similar activities to the IBRD but extends loans to low income countries on highly concessional 
terms; these activities form part of foreign aid (see concessional loans). About 75% of World Bank lending is through the IBRD.  
World Trade Organization (WTO) An international organisation that provides the institutional and legal framework for the trading system that exists between member nations worldwide, responsible for liberalising trade, operating 
a system of trade rules and providing a forum for trade negotiations between governments, and for settling trade disputes.   

30 
Dr McCormick 
IB Economics 
Master handout 

Diagrams 
MICRO 
Market demand as the sum of individual demands; Movements along and shifts of the demand curve  

 
 
Market supply as the sum of individual supplies; Movements along and shifts of the supply curve 

 
 
Changes in demand and the new equilibrium price and quantity; Changes in supply and the new equilibrium price and quantity  

 
 
Market equilibrium; Price as a signal and incentive; Consumer and producer surplus in a competitive market 

31 
Dr McCormick 
IB Economics 
Master handout 

 
HL only: Shifts of the demand curve (changes in a in the function Qd = a – bP ); Changing the slope of the demand curve (changes in b in the function Qd = a – bP; Shifts of the supply curve (changes in c in the supply function Qs 
= c + dP ); Changing the slope of the supply curve (changes in d in the function Qs = c + dP ) 

 
 
Demand curves and PED; Variability of PED along a straight-line demand curve 

 
PED and total revenue; Price fluctuations are larger for primary commodities because of low PED 

 
PED, indirect taxes and government tax revenue; Cross-price elasticities; Demand curve shifts in response to increases in income for different YEDs 

32 
Dr McCormick 
IB Economics 
Master handout 

 
Supply curves and PES; Price fluctuations are larger for primary commodities because of low PES 

 
 
Supply curve shifts due to indirect (excise) taxes; Impacts of specific and ad valorem taxes on market outcomes; Impacts of subsidies on market outcomes 

 
 
Price ceiling (maximum price) and market outcomes; Welfare impacts of a price ceiling (maximum price); Price floor (minimum price) and market outcomes; An agricultural product market with price floor and government purchases 
of the surplus 

 
 
Welfare impacts of a price floor (minimum price) for agricultural products and government purchases of the surplus; Labour market with minimum wage (price floor); Welfare impacts of a minimum wage 

 
 
   

33 
Dr McCormick 
IB Economics 
Master handout 

HL Only: Incidence of an indirect tax with inelastic and elastic demand; Incidence of an indirect tax with inelastic and elastic supply 

 
 
HL Only: Effects of indirect taxes on consumer and producer surplus; Effects of subsidies on consumer and producer surplus 

 
 
Demand, supply and allocative efficiency with no externalities; Negative production externality; Welfare loss (deadweight loss) in a negative production externality; Government regulations to correct negative production externalities 

 
 
Market-based policies to correct negative production externalities; Negative consumption externality; Welfare loss (deadweight loss) in a negative consumption externality 

 
 
   

34 
Dr McCormick 
IB Economics 
Master handout 

Correcting negative consumption externalities; Positive production externality; Welfare loss (deadweight loss) in a positive production externality 

 
Correcting positive production externalities; Positive consumption externality; Welfare loss (deadweight loss) in a positive consumption externality 

 
Correcting positive consumption externalities 

 
   

35 
Dr McCormick 
IB Economics 
Master handout 

THEORY OF THE FIRM - UNTIL MACRO BEGINS ALL DIAGRAMS HL ONLY 

Total, marginal and average products; Total, average and marginal cost curves; Product curves and cost curves are mirror images due to the law of diminishing returns; The long-run average total cost curve 

 
 
Profit maximisation using the total revenue and total cost approach when the firm has no control over price; Profit maximisation using the total revenue and total cost approach when the firm has control over price 

 
 
Market (industry) D & S determine demand faced by the perfectly competitive firm; Revenue curves under perfect competition; Summary of the perfectly competitive firm’s short-run decisions, and the firm’s short-run S-curve 

36 
Dr McCormick 
IB Economics 
Master handout 

 
Short-run equilibrium positions of the perfectly competitive firm  

 
 
From short-run equilibrium to long-run equilibrium 

 
 
The firm and industry long-run equilibrium position in perfect competition; Productive and allocative efficiency in perfect competition in the long run  

 
 
Revenue curves in monopoly; Profit maximisation and loss minimisation in monopoly: marginal revenue and cost approach; Comparison of profit maximisation and revenue maximisation by the monopolist; Natural monopoly; 
Higher price, lower output by the firm in monopoly 

37 
Dr McCormick 
IB Economics 
Master handout 

 
Consumer and producer surplus and welfare (deadweight) loss in monopoly compared with perfect competition; Allocative and productive inefficiency in perfect competition and monopoly  

 
 
Short-run equilibrium positions of the firm in monopolistic competition; Long-run equilibrium of the firm in monopolistic competition 

 
 
Game theory: the prisoner’s dilemma; Profit maximisation by a price-fixing cartel; The kinked demand curve; Third-degree price discrimination  

 
 
   

38 
Dr McCormick 
IB Economics 
Master handout 

MACRO 
Circular flow of income in a closed economy without government; Circular flow of income model with leakages and injections 

 
 
The business cycle; Illustrating actual output, potential output and unemployment in the business cycle 

 
 
The aggregate demand (AD) curve; The short-run aggregate supply curve (SRAS); Three short-run equilibrium states of the economy 

 
 
   

39 
Dr McCormick 
IB Economics 
Master handout 

Impacts of changes in short-run macroeconomic equilibrium; Possible causes of the business cycle; The LRAS curve and long-run equilibrium in the monetarist/ new classical model 

 
 
Returning to long-run full employment equilibrium in the monetarist/new classical model; Changes in long-run equilibrium in the monetarist/new classical AD-AS model; The Keynesian aggregate supply curve  

 
 
Three equilibrium states of the economy in the Keynesian model; Effects of increases in aggregate demand on real GDP and the price level 

 
 
Increasing potential output, shifts in aggregate supply curves and long-term economic growth 

40 
Dr McCormick 
IB Economics 
Master handout 

 
Long-term economic growth: achieving potential (full employment) output in a growing economy; HL Only: Aggregate demand, real GDP and the multiplier in the Keynesian model; How the effect of the multiplier changes 
depending on the price level  

 
 
Structural unemployment; Cyclical unemployment  

 
 
Demand-pull inflation; Cost-push inflation 

 
 
   

41 
Dr McCormick 
IB Economics 
Master handout 

Stagflation: outward shifts of the short-run Phillips curve due to decreasing SRAS; The short-run and long-run Phillips curves;  

 
 
Using the production possibilities model to illustrate economic growth; Lorenz curves: Belarus achieves greater income equality than Bolivia; Lorenz curves and income redistribution 

 
 
Effects of expansionary policy: eliminating a recessionary (deflationary) gap; Effects of contractionary policy: eliminating an inflationary gap 

 
 
Crowding out of private investment; The money market and determination of the rate of interest 

42 
Dr McCormick 
IB Economics 
Master handout 

INTERNATIONAL TRADE 
Absolute and comparative advantage; Identical opportunity costs: no gains from trade; Comparative advantage 

 
 
Comparative advantage; The gains from specialisation and trade based on comparative advantage: both countries consume outside their PPC; Production subsidies 

 
 
Effects of a tariff; Effects of a quota 

 
 
Exchange rate determination in a freely floating exchange rate system; Exchange rate changes in a freely floating exchange rate system 

43 
Dr McCormick 
IB Economics 
Master handout 

 
Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00; Using a PPC to illustrate a trade deficit and a trade surplus 

 
 
HL ONLY: Changes in global demand or supply: terms of trade impacts on the balance of trade; Long-term declines in primary product prices due to low growth in demand (due to low YEDs) and high growth in supply (due to 
technological advances) 

 
 
DEVELOPMENT 
Economic growth and economic development; The poverty cycle (poverty trap) 

   

44 
Dr McCormick 
IB Economics 
Master handout 

Past HL questions: paper 1 

Date  Marks  Branch  Topic  Question 
Nov-17  10  Micro  D&S  With reference to demand and supply in competitive markets, explain how the economic question “what to produce” is answered. 
Nov-17  15  Micro  Market failure  Discuss the consequences of the direct provision of public goods by the government 
Nov-17  10  Micro  Theory of the firm  Explain why firms in oligopolistic markets may prefer to use non-price competition. 
Nov-17  15  Micro  Theory of the firm  Discuss the reasons why firms compete or collude in oligopolistic markets 
Nov-17  10  Macro  Macroeconomic objectives  Explain why structural unemployment may occur in an economy 
Nov-17  15  Macro  Macroeconomic objectives  Discuss the view that the best way to reduce unemployment is through education and training. 
Nov-17  10  Macro  Fiscal policy  Explain how short-term fluctuations in the level of economic activity may be evened out through the impact of automatic stabilizers 
Nov-17  15  Macro  Fiscal policy  Evaluate the view that the use of fiscal policy is the most effective way of reducing the rate of inflation in an economy. 
May-17  10  Micro  D&S  Explain how an increase in the costs of factors of production would affect the market price and output of a good. 
May-17  15  Micro  Government intervention  Discuss the consequences for different stakeholders in the economy of the government providing subsidies on goods, such as renewable energy 
May-17  10  Micro  Theory of the firm  Explain why a loss-making firm in perfect competition would shut down in the long run. 
May-17  15  Micro  Theory of the firm  Discuss the view that perfect competition is a more desirable market structure than monopoly. 
May-17  10  Macro  Monetary policy  Explain how equilibrium interest rates are determined in an economy. 
May-17  15  Macro  Monetary policy  Discuss whether an increase in interest rates is the most effective way of reducing the rate of inflation in an economy. 
May-17  10  Macro  Macroeconomic objectives  Explain the cause of cyclical (demand-deficient) unemployment. 
May-17  15  Macro  Macroeconomic objectives  Discuss the view that the most significant consequence of unemployment is the loss of tax revenue for the government. 
May-17  10  Micro  Market failure  Explain how the overuse of common access resources can lead to negative externalities. 
Discuss the view that the best way to reduce the threat to sustainability, arising from the burning of fossil fuels, is for the government to provide subsidies to firms that 
May-17  15  Micro  Market failure 
produce energy through renewable sources 
May-17  10  Micro  Theory of the firm  Explain why a loss-making firm in perfect competition would shut down in the long run. 
May-17  15  Micro  Theory of the firm  Discuss the view that perfect competition is a more desirable market structure than monopoly. 
May-17  10  Macro  AD&AS  Explain the impact that a fall in the world price of oil might have on aggregate supply and gross domestic product (GDP) in an economy. 
May-17  15  Macro  Macroeconomic objectives  Evaluate the view that economic growth is best achieved through improvements in technology. 
May-17  10  Macro  Macroeconomic objectives  Explain why a high rate of inflation may negatively affect both a country’s export competitiveness and the level of capital investment by firms. 
May-17  15  Macro  Monetary policy  Discuss the view that the use of monetary policy is always the best way to reduce inflation. 
Nov-16  10  Micro  D&S  Using a production possibilities curve (PPC) diagram, explain why choices have to be made in all economies. 
Nov-16  15  Micro  Government intervention  Discuss the view that governments should not intervene in housing markets. 
Nov-16  10  Micro  Market failure  Explain why the under-consumption of merit goods causes market failure. 
Nov-16  15  Micro  Market failure  Discuss whether there should always be direct provision of public goods by the government. 
Nov-16  10  Macro  Monetary policy  Explain how expansionary monetary policy might lead to a rise in inflation. 
Nov-16  15  Macro  Macroeconomic objectives  Discuss the view that the most significant impact of high inflation in a country is a loss of export competitiveness. 
Nov-16  10  Macro  Macroeconomic objectives  Explain what effect an increase in interest rates might have on unemployment. 
Nov-16  15  Macro  Fiscal policy  Evaluate the effectiveness of fiscal policy as a tool to reduce unemployment. 
Market failure can occur when there is asymmetric information, abuse of monopoly power and positive externalities. Explain why any two of these represent market 
May-16  10  Micro  Market failure 
failure. 
May-16  15  Micro  Market failure  Evaluate the view that regulations are the most effective government response to the market failure of negative externalities. 
May-16  10  Micro  Theory of the firm  Explain the conditions necessary for firms in oligopolistic markets to engage in price discrimination. 
May-16  15  Micro  Theory of the firm  Discuss whether producers in oligopolistic markets should compete or collude. 
May-16  10  Macro  Fiscal policy  Explain the impact of automatic stabilizers on an economy 
May-16  15  Macro  Fiscal policy  Evaluate the effectiveness of fiscal policy in achieving economic growth. 
May-16  10  Macro  AD&AS  Using the Keynesian AD/AS diagram, explain why an economy may be in equilibrium at any level of real output. 
May-16  15  Macro  Macroeconomic objectives  Evaluate the view that increased investment is the most important factor in achieving a faster rate of economic growth. 
May-16  10  Micro  Elasticity  Explain how the incidence of an indirect tax depends on the price elasticity of demand and the price elasticity of supply 
May-16  15  Micro  Government intervention  Discuss the consequences of imposing an indirect tax on unhealthy food. 
May-16  10  Micro  Theory of the firm  Explain why firms may not always pursue the goal of profit maximization 
May-16  15  Micro  Theory of the firm  In monopoly, economic (abnormal) profit can be earned in both the short run and the long run. Examine the role of barriers to entry in earning economic profit. 
May-16  10  Macro  Fiscal policy  Explain how an increase in the level of taxation can influence the level of aggregate demand in an economy. 
May-16  15  Macro  Fiscal policy  Evaluate the effectiveness of fiscal policy in promoting economic activity during a recession. 

45 
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IB Economics 
Master handout 

May-16  10  Macro  AD&AS  Using the Keynesian AD/AS diagram, explain why an economy may be in equilibrium at any level of real output. 
May-16  15  Macro  Macroeconomic objectives  Evaluate the view that increased investment is the most important factor in achieving a faster rate of economic growth. 
Nov-15  10  Micro  Government intervention  Explain why a government might decide to impose an indirect tax on the consumption of cigarettes. 
Nov-15  15  Micro  Government intervention  Discuss the possible consequences of the imposition of an indirect tax on cigarettes for the different stakeholders in the market. 
Nov-15  10  Micro  Theory of the firm  Explain why a firm in monopolistic competition will make normal profit in the long run. 
Nov-15  15  Micro  Theory of the firm  Evaluate the view that monopolistic competition is a more efficient market structure than monopoly. 
Nov-15  10  Macro  Fiscal policy  Explain how fiscal policy can be used to achieve long-term economic growth (increases in potential output). 
Nov-15  15  Macro  Macroeconomic objectives  Discuss the view that economic growth always leads to a more equal distribution of income and a reduction in unemployment. 
Nov-15  10  Macro  Macroeconomic objectives  Explain why, using the monetarist/new classical model, the economy will always return to the full employment level of output following a recession. 
Nov-15  15  Macro  AD&AS  Evaluate the view that an increase in aggregate demand will always be inflationary. 
May-15  10  Micro  D&S  Explain how changes in price work to reallocate resources in a market. 
May-15  15  Micro  Market failure  Discuss the view that the overuse of common access resources is best addressed by government. 
May-15  10  Micro  Theory of the firm  Explain two possible government responses to the abuse of monopoly power 
May-15  15  Micro  Theory of the firm  Evaluate the view that monopolies, despite their inefficiencies, may often be considered desirable. 
May-15  10  Macro  Fiscal policy  Using the concept of the Keynesian multiplier, explain the possible impact of a rise in government spending on economic growth. 
May-15  15  Macro  Macroeconomic objectives  To what extent might unemployment represent an economic and social problem? 
May-15  10  Macro  Supply-side policies  Explain how business spending on research and development and government expenditure on infrastructure might shift the long-run aggregate supply curve. 
May-15  15  Macro  Supply-side policies  Evaluate the effectiveness of interventionist supply-side policies to achieve economic growth. 
May-15  10  Micro  D&S  Explain how changes in price work to reallocate resources in a market. 
May-15  15  Micro  Market failure  Discuss the view that the overuse of common access resources is best addressed by government. 
May-15  10  Micro  Theory of the firm  Explain why prices tend to be stable in oligopolistic markets. 
May-15  15  Micro  Theory of the firm  Oligopolists often possess too much monopoly power. Evaluate whether governments should intervene in oligopolistic markets. 
May-15  10  Macro  Macroeconomic objectives  Explain what is meant by the natural rate of unemployment 
May-15  15  Macro  Macroeconomic objectives  Discuss the view that there is no trade-off between inflation and unemployment. 
May-15  10  Macro  Supply-side policies  Explain how business spending on research and development and government expenditure on infrastructure might shift the long-run aggregate supply curve. 
May-15  15  Macro  Supply-side policies  Evaluate the effectiveness of interventionist supply-side policies to achieve economic growth. 
Nov-14  10  Micro  D&S  Using diagram(s), explain the signalling and incentive functions of price. 
Nov-14  15  Micro  Market failure  Evaluate the view that the market failure caused by the consumption of demerit goods is best dealt with through the use of taxation. 
Nov-14  10  Micro  Theory of the firm  Explain why firms might wish to collude. 
Nov-14  15  Micro  Theory of the firm  Discuss the view that governments should always try to prevent a monopoly occurring in a market. 
Nov-14  10  Macro  Macroeconomic objectives  Distinguish between structural and demand-deficient unemployment. 
Nov-14  15  Macro  Supply-side policies  Discuss the view that the problem of unemployment can be reduced through the use of supply-side policies 
Nov-14  10  Macro  Macroeconomic objectives  Using an appropriate diagram, explain how a recession might lead to more poverty. 
Nov-14  15  Macro  Macroeconomic objectives  Evaluate the view that attempts to achieve greater equity in the distribution of income will reduce economic efficiency 
May-14  10  Micro  Market failure  Analyse the private and external benefits associated with the consumption of university education. 
May-14  15  Micro  Market failure  Evaluate the policies a government might use to increase the consumption of university education 
May-14  10  Micro  Theory of the firm  Using a diagram, explain why firms in monopolistic competition are neither allocatively nor productively efficient 
Examine the view that the market for food is more beneficial to consumers if dominated by a monopoly retailer (supermarket) rather than by a large number of small 
May-14  15  Micro  Theory of the firm 
shops operating under monopolistic competition. 
May-14  10  Macro  Monetary policy  Explain how the aggregate demand curve can be shifted by a reduction in interest rates. 
May-14  15  Macro  Monetary policy  Evaluate the effectiveness of monetary policy to increase aggregate demand during a recession. 
May-14  10  Macro  Macroeconomic objectives  Explain two factors which might cause economic growth. 
May-14  15  Macro  Macroeconomic objectives  Evaluate the view that the benefits of economic growth will always outweigh the costs. 
Using diagrams, explain how a change in one of the determinants of demand might increase the price of rice and how a change in one of the determinants of supply 
May-14  10  Micro  D&S 
might decrease the price of rice. 
May-14  15  Micro  Government intervention  Discuss the consequences of providing a subsidy on the production of rice for producers, consumers and the government. 
May-14  10  Micro  Theory of the firm  Using diagrams, explain why a perfectly competitive firm can make economic (abnormal) profit only in the short run. 
May-14  15  Micro  Theory of the firm  Discuss the consequences of a perfectly competitive industry becoming a monopoly 
May-14  10  Macro  Macroeconomic objectives  Using two AD/AS diagrams, explain cost-push and demand-pull inflation 
May-14  15  Macro  Macroeconomic objectives  “The rate of inflation can be most effectively reduced through the use of monetary policy.” To what extent do you agree with this statement? 

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Dr McCormick 
IB Economics 
Master handout 

May-14  10  Macro  Macroeconomic objectives  Explain two factors which might cause economic growth. 
May-14  15  Macro  Macroeconomic objectives  Evaluate the view that the benefits of economic growth will always outweigh the costs. 
Nov-13  10  Micro  Government intervention  Using a price ceiling diagram, analyse the impact a maximum price might have on the market for food. 
Nov-13  15  Micro  Government intervention  Discuss the policies a government might use to make food more affordable to low income groups. 
Nov-13  10  Micro  Market failure  Explain why governments impose indirect taxes. 
Nov-13  15  Micro  Market failure  Discuss two possible government responses to threats to sustainability. 
Nov-13  10  Macro  Level of economic activity  Explain how changes in the size of the circular flow depend on the relative size of injections and leakages. 
Nov-13  15  Macro  Level of economic activity  Evaluate the use of national income statistics for making comparisons of the standard of living over time. 
Nov-13  10  Macro  Macroeconomic objectives  Explain why measuring the rate of inflation using a consumer price index (CPI) may not be accurate. 
Nov-13  15  Macro  Macroeconomic objectives  Evaluate two government policies to reduce inflation 
May-13  10  Micro  Theory of the firm  Distinguish between decreasing returns to scale and the law of diminishing returns. 
May-13  15  Micro  Theory of the firm  Using diagrams, compare and contrast the market structure of monopoly with that of perfect competition. 
May-13  10  Micro  Elasticity  Explain the factors which might influence the cross price elasticity of demand between different products. 
May-13  15  Micro  Elasticity  Examine the importance of income elasticity of demand for the producers of primary products, manufactured goods and services. 
May-13  10  Macro  Monetary policy  Using a diagram, describe how expansionary monetary policy might be used to close a deflationary (recessionary) gap. 
May-13  15  Macro  AD&AS  Discuss why, in contrast to the monetarist/new classical model, an economy can remain stuck in a deflationary (recessionary) gap according to the Keynesian model. 
May-13  10  Macro  Supply-side policies  Explain how labour market reforms may be used to promote economic growth. 
“Market-oriented supply-side policies will always be more effective in promoting economic growth than demand-side policies.” To what extent do you agree with this 
May-13  15  Macro  Supply-side policies 
statement? 
May-13  10  Micro  Theory of the firm  Explain how welfare loss may result from monopoly power. 
May-13  15  Micro  Theory of the firm  Discuss the effectiveness of government policies (legislation and regulation) to reduce monopoly power. 
May-13  10  Micro  Elasticity  Using diagrams, explain how the incidence of an indirect tax may be affected by the price elasticity of demand. 
May-13  15  Micro  Market failure  To what extent might the problems of negative externalities of consumption be resolved by the use of indirect taxation? 
May-13  10  Macro  Macroeconomic objectives  Explain why the market system may not result in an equitable distribution of income. 
May-13  15  Macro  Macroeconomic objectives  Evaluate government policies to promote equity in terms of their effects on efficiency in the allocation of resources. 
May-13  10  Macro  Supply-side policies  Explain how labour market reforms may be used to promote economic growth 
“Market-oriented supply-side policies will always be more effective in promoting economic growth than demand-side policies.” To what extent do you agree with this 
May-13  15  Macro  Supply-side policies 
statement?  
 
Past HL mark schemes: paper 1, 2017 questions 
Question  Mark scheme 

With reference to demand and supply in competitive  Definitions of demand, supply, competitive markets; diagram(s) to show demand and supply and the price mechanism; explanation of how scarcity and opportunity cost 
markets, explain how the economic question “what to  necessitates choices and how the price mechanism works to provide incentives; examples of choices and price mechanism at work. 
produce” is answered. 

Discuss the consequences of the direct provision of public  Definition of public goods; PPF diagram to show the trade-off between public good and private goods. Candidates should not be expected to use a diagram for this part 
goods by the government  of the question; explanation of the relationship between the characteristics of public goods, the free rider problem and market failure; examples of public goods and/or 
consequences of their direct provision; synthesis or evaluation (discuss). Discussion may include: the extent to which public goods exist, the opportunity cost of 
providing public goods, the extent to which the government understands what is best in terms of allocating resources and moral hazard. 

Explain why firms in oligopolistic markets may prefer to use non-price  Definitions of oligopoly, non-price competition; diagram to show the kinked demand curve; explanation of interdependence, price stability, what non-price competition; is, non-collusive oligopoly; example 
competition.  of firms using non-price competition or firms that have engaged in price competition. 

Discuss the reasons why firms compete or collude in oligopolistic  Definitions of collusion, oligopolistic markets; diagram(s) to show oligopoly; explanation of why firms may choose to collude or not to collude, why interdependence is central to this decision, tacit 
markets  collusion and price leadership; example of where firms have colluded or not colluded; synthesis or evaluation (discuss). Discussion may include: the information problem that oligopoly firms face, some 
consideration of why cartels are difficult to maintain due to their unenforceability, the incentive to cheat of members of cartels. Incentives to collude might be considered such as joint profit maximization. 

Explain why structural unemployment may occur in an  Definitions of unemployment and structural unemployment; diagram to show the decline in employment caused by structural factors; explanation of how the structural 
economy  changes in the economy lead to unemployment because workers do not have the skills or geographical mobility to get a new job quickly; examples of where the decline of 

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IB Economics 
Master handout 

a market leads to structural unemployment. 

Discuss the view that the best way to reduce unemployment  Definition of unemployment; diagram to show how education and training increases the supply of available labour and leads to a rise in employment; explanation that 
is through education and training.  education and training increases the skill level of unemployed workers and increases their opportunities for employment; examples of where education and training has 
reduced unemployment; synthesis or evaluation (discuss). Discussion may include: consideration of how education and training might be appropriate for structural 
unemployment, but might not be as effective with demand-deficient and frictional unemployment. There could be consideration of the cost and effectiveness of 
government run education and training. There could also be consideration that alternative policies are more effective than education and training in reducing certain types 
of unemployment. 

Explain how short-term fluctuations in the level of  definitions of automatic stabilizers, fluctuations in the level of economic activity; diagram(s) to show either increases or decreases in AD depending on the direction of 
economic activity may be evened out through the impact of  the stabilization; or use of a business cycle diagram showing smaller fluctuations; explanation of how factors such as progressive taxes and unemployment benefits tend 
automatic stabilizers  to work counter-cyclically to stabilize short-term fluctuations in the level of economic activity; examples of automatic stabilizers working in practice. 

Evaluate the view that the use of fiscal policy is the most  definitions of fiscal policy, rate of inflation; diagram to show the impact of deflationary fiscal policy (shift AD left); explanation of the mechanisms through which 
effective way of reducing the rate of inflation in an  deflationary fiscal policy may lower the rate of inflation through its impact on AD; examples of fiscal policy being used to lower the rate of inflation; synthesis or 
economy.  evaluation. Evaluation may include: the importance of the type of inflation, possible conflicts with other objectives of economic policy, the direct impact on AD, the 
problem of time lags, political constraints, the use of fiscal policy to influence the supply side of the economy. There could also be consideration of alternative policies to 
reduce the rate of inflation, such as monetary policy and supply side policies. 

Explain how an increase in the costs of factors of  definitions of factors of production, market price; diagram to show the effect of an increase in costs of factors of production (leftwards shift of supply); explanation of 
production would affect the market price and output of a  why an increase in costs of factors of production will decrease product supply and ceteris paribus increase the price and reduce output; examples of costs of factors of 
good.  production increasing. 

Discuss the consequences for different stakeholders in the  definitions of subsidies and stakeholders; diagram to show the full impact of a subsidy, eg cost to government, reduction in price to consumer; explanation of the 
economy of the government providing subsidies on goods,  potential consequences for consumers, producers, government and society; examples of the use of subsidies in practice; synthesis or evaluation (discuss). Discussion may 
such as renewable energy  include: the importance of price elasticity of demand, opportunity cost issues, externality issues, equity issues and efficiency issues. 

Explain why a loss-making firm in perfect competition would shut  definitions of perfect competition and long run; diagram(s) to show the shutdown point in perfect competition; explanation of why a firm shuts down in the long run when a loss-making firm can cover 
down in the long run.  its variable costs in the short run but cannot cover its total costs in the long run. It is not making a normal profit; examples of markets which have features of perfect competition. 

Discuss the view that perfect competition is a more desirable market  definitions of market structure, perfect competition and monopoly; diagram(s) to show the differences between perfect competition and monopoly; explanation that perfect competition has a number of 
structure than monopoly.  advantages like lower; prices, greater choice and allocative and productive efficiency compared with monopoly; examples of markets which have features of perfect competition and monopoly; synthesis or 
evaluation (discuss). Discussion may include: reference to benefits of monopoly such as economies of scale, research and development, natural monopoly, and/or the disadvantages of monopoly (higher 
price, lower output). To focus on the word “desirable” in the question, discussion may also include the advantages and disadvantages of perfect competition. 

Explain how equilibrium interest rates are determined in an  definition of interest rates; diagram to show the demand and supply of money; explanation of the interaction of supply and demand in determining interest rates. An 
economy.  explanation of the role of the central bank in determining interest rates examples of changes in interest rates. 

Discuss whether an increase in interest rates is the most  definitions of interest rates and rate of inflation; diagram to show how an increase in interest rates will reduce AD, leading to a decrease in the price level; explanation of 
effective way of reducing the rate of inflation in an  how an increase in interest rates will reduce borrowing and spending, leading to a reduction in C and I; examples of interest rate policy; synthesis or evaluation (discuss). 
economy.  Discussion may include: the limitations of monetary policy like time lags and the independence of the central bank. Also, the effectiveness of monetary policy may be 
reduced if inflation and interest rates are already very high. In addition there may be reference to alternative policies like fiscal policy and supply-side policies. 

Explain the cause of cyclical (demand-deficient)  definition of cyclical (demand-deficient) unemployment; diagram(s) to show cyclical (demand-deficient) unemployment; explanation of how cyclical (demand-deficient) 
unemployment.  unemployment is caused by a fall in aggregate demand; examples of cyclical (demand-deficient) unemployment. 

Discuss the view that the most significant consequence of  definitions of unemployment and tax revenue; diagram to show possible consequence on AD of decreases in government tax revenue and therefore government 
unemployment is the loss of tax revenue for the  spending; explanation of how increased unemployment will decrease tax revenue and may lead to a budget deficit and/or a reduction in government spending; examples 
government.  of consequences of unemployment; synthesis or evaluation (discuss). Discussion may include: the other economic and personal and social consequences of 
unemployment, eg loss of GDP, increased cost of unemployment benefits, greater disparities in the distribution of income or an increase in government spending due to 
falling tax revenues and increased unemployment benefits acting as an automatic stabilizer. 

Explain how the overuse of common access resources can  definitions of common access resources and negative externalities; diagram to show negative externalities arising from overconsumption (depletion of common access 

48 
Dr McCormick 
IB Economics 
Master handout 

lead to negative externalities.  resources) or production (environmental degradation as a by-product of production activities); explanation that overuse of common access resources can lead to 
environmental damage or resource depletion, which are forms of market failure, leading to negative externalities of production or consumption; examples of how overuse 
of common access resources leads to negative externalities such as overfishing, open-cast mining and deforestation. 

Discuss the view that the best way to reduce the threat to  definition of subsidies and sustainability; diagram(s) to show the impact of subsidies on the market for renewable energy and the market for fossil fuels; explanation that 
sustainability, arising from the burning of fossil fuels, is for  subsidies reduce the costs of production for renewable energy firms and the price of renewable energy to consumers, which reduces the demand for energy produced by 
the government to provide subsidies to firms that produce  burning fossil fuels. This creates greater sustainability in the energy market; examples of subsidies on the market for renewable energy such as solar power and wind 
energy through renewable sources  farms; synthesis or evaluation (discuss). Discussion may include: alternative policies that could be used instead of subsidies, consideration of the impact of subsidies on 
different stakeholder groups, negative effects on the fossil fuel industry. It could also consider the short-term costs of subsidies and the long-term benefits on 
sustainability. 

Explain why a loss-making firm in perfect competition would shut  definitions of perfect competition and long run; diagram(s) to show the shutdown point in perfect competition; explanation of why a firm shuts down in the long run when a loss-making firm can cover 
down in the long run.  its variable costs in the short run but cannot cover its total costs in the long run. It is not making a normal profit; examples of markets which have features of perfect competition. 

Discuss the view that perfect competition is a more desirable market  definitions of market structure, perfect competition and monopoly; diagram(s) to compare and contrast perfect competition and monopoly; explanation that perfect competition has a number of 
structure than monopoly.  advantages like lower prices, greater choice and allocative and productive efficiency compared with monopoly; examples of markets which have features of perfect competition and monopoly; synthesis or 
evaluation (discuss). Discussion may include: reference to benefits of monopoly such as economies of scale, research and development, natural monopoly, and/or the disadvantages of monopoly (higher 
price, lower output). To focus on the word “desirable” in the question, discussion may also include the advantages and disadvantages of perfect competition. 

Explain the impact that a fall in the world price of oil might  definitions of aggregate supply and GDP; diagram to show AS/SRAS shifting to right and GDP increasing; explanation that in an oil importing country a fall in the price 
have on aggregate supply and gross domestic product  of oil reduces production costs to industry and causes the aggregate supply to increase and GDP to rise; example of economies where fall in oil prices has increased 
(GDP) in an economy.  aggregate supply and GDP in an economy. Explanation may include: the perspective of an oil exporting country as an alternative to an oil importing country. In this case, 
a fall in the world price of oil would mean reduced export revenues, and as net exports are a component of aggregate demand, this would cause aggregate demand and 
GDP to decrease. 

Evaluate the view that economic growth is best achieved  definition of economic growth; diagram to show LRAS increasing and real output increasing; explanation of how technological improvements cause LRAS to increase in 
through improvements in technology.  the long term as industry becomes more productive; examples of technological improvements increasing LRAS in an economy synthesis or evaluation. Evaluation may 
include: the effect of advances in technology being dependent on the skill level of the labour force and whether the technology is appropriate for the development level 
of the economy. The response may also consider how factors other than technology might affect LRAS such as the discovery of new natural resources and the 
importance of aggregate demand in affecting growth in the short term. A PPF diagram may be rewarded equally if used to explain economic growth effectively. 

Explain why a high rate of inflation may negatively affect  definitions of inflation, export competitiveness and investment; diagram to show the impact of inflation on the price level and output eg AD/AS; explanation of why 
both a country’s export competitiveness and the level of  inflation might produce adverse effects; example(s) of where inflation has affected a country’s export competitiveness and/or the level of capital investment. 
capital investment by firms. 

Discuss the view that the use of monetary policy is always  definition of monetary policy; diagram(s) to show the application of policy to deal with inflation, AD/AS; explanation of the way in which policy impacts the rate of 
the best way to reduce inflation.  inflation; examples of where such policy has been used; synthesis or evaluation (discuss). Discussion may include: the impacts of monetary policy on the economy, trade, 
employment, households, savings, investment, confidence, etc. It may also consider the merits of monetary policy in comparison with alternative policies to control 
inflation. It may consider the merits of policy options in relation to cost-push versus demand-pull inflation. 
 

49