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INFLATION: A persistent increase in the average price level in the economy. Inflation occurs when the AVERAGE price level (that is, prices IN GENERAL) increases over time. This does NOT mean that ALL prices increase the same, nor that ALL prices necessarily increase. Some prices might increase a lot, others a little, and still other prices decrease or remain unchanged. Inflation results when the AVERAGE of these assorted prices follows an upward trend. Inflation is the most common phenomenon associated with the price level.

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Lesson 11: Circular Flow | Unit 1: Basic Flow Page: 4 of 22

Topic: The Physical Flow <=PAGE BACK | PAGE NEXT=>

Two sectors: household and business.

Two markets: product and factor.

  • The physical flow is the counter-clockwise flow of resources from the household to business sector and production from the business to household sector.
  • Production flows from the business sector (supply) to the household sector (demand) through the product markets.
  • Resources flow from the household sector (demand) to the business (supply) sector through the factor markets.
  • The household sector sells the resources through the factor markets and buy goods through the product markets.
  • The business sector buys resources through the factor markets and sells goods through the product markets.

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FACTOR MARKET, EFFICIENCY

A factor market achieves efficiency in the allocation of resources by equating marginal revenue product to factor price. Perfect competition, as the efficiency benchmark, is the only market structure to satisfy this criterion and achieve factor market efficiency. Monopsony, oligopsony, and monopsonistic competition are inefficient because they equate marginal revenue product to marginal factor cost, both of which are greater than factor price.

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Today, you are likely to spend a great deal of time watching the shopping channel looking to buy either an instructional DVD on learning to the play the oboe or a small, foam rubber football. Be on the lookout for the last item on a shelf.
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Helping spur the U.S. industrial revolution, Thomas Edison patented nearly 1300 inventions, 300 of which came out of his Menlo Park "invention factory" during a four-year period.
"Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success. "

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