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PHYSICAL FLOW: In the circular flow, the counter-clockwise transfer of goods and services from the business sector to the household sector and the transfer of resource services from the household sector to the business sector. The payment flow moves in the opposite direction. The physical flow, the physical movement of goods and services, is the foundation of the economy's circular flow. The fundamental problem of scarcity is addressed by physically transforming scarce resources into goods and services that are then used to satisfy wants and needs.

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Lesson Contents
Unit 1: The Exchange
  • What It Is
  • Equilibrium
  • Competition
  • Number
  • Unit 1 Summary
  • Unit 2: The Numbers
  • Schedule
  • Market Agreement
  • Equilibrium
  • Unit 2 Summary
  • Unit 3: A Graph
  • The Curves
  • The Equilibrium
  • Unit 3 Summary
  • Unit 4: Adjustment
  • Self-Correction
  • Shortage
  • Surplus
  • Unit 4 Summary
  • Unit 5: Efficiency
  • What It Is
  • Efficient Markets
  • Too Little Production
  • Too Much Production
  • Inefficiency
  • Unit 5 Summary
  • Course Home
    Market

    In this lesson, we'll see how buyers (discussed in the demand lesson) come together with sellers (discussed in the supply lesson) to exchange commodities using a market. More precisely, this lesson develops an abstract market model, or market analysis, that we can use to explain and understand a wide range of real world exchanges.

    • This lesson begins with an overview of the basic exchange process underlying markets, including the notion of equilibrium, the roles played by price and quantity, and the importance of competition.
    • In the second unit we work through a simple market analysis using demand and supply schedules, highlight both equilibrium and disequilibrium conditions.
    • The third unit then carefully examines the notion of market equilibrium using demand and supply curves, which generates the widely used graphical model of the market.
    • Moving onto the fourth unit, we use the graphical market model to investigate the automatic market responses to shortages and surpluses.
    • The lesson concludes in the fifth unit by considering the relation between market exchanges and efficiency.

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    AUTONOMOUS CONSUMPTION

    Household consumption expenditures that do not depend on income or production (especially disposable income, national income, or even gross domestic product). That is, changes in income do not generate changes in consumption. Autonomous consumption is best thought of as a baseline or minimum level of consumption that the household sector undertakes in the unlikely event that income falls to zero. It is measured by the intercept term of the consumption function or the consumption line. The alternative to autonomous consumption is induced consumption, which does depend on income.

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    Today, you are likely to spend a great deal of time waiting for visits from door-to-door solicitors looking to buy either a wall poster commemorating the 2000 Olympics or a flower arrangement with a lot of roses for your grandmother. Be on the lookout for gnomes hiding in cypress trees.
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