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SELF CORRECTION: The process through which a model, especially the market and the aggregate market, automatically adjust to equilibrium through changes in one of the variables. For the standard market, self-correction involves changes in the market price to eliminate shortages and surpluses. For the aggregate market, self-correction involves changes in wages, which shift the short-run aggregate supply curve and move the aggregate market from short-run equilibrium to long-run equilibrium.

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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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INTEREST-RATE EFFECT

A change in aggregate expenditures on real production, especially those made by the household and business sectors, that results because a change in the price level alters the interest rate which then affects the cost of borrowing. This is one of three effects underlying the negative slope of the aggregate demand curve associated with a movement along the aggregate demand curve and a change in aggregate expenditures. The other two are real-balance effect and net-export effect.

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Today, you are likely to spend a great deal of time touring the new suburban shopping complex wanting to buy either a replacement remote control for your television or a replacement nozzle for your shower. Be on the lookout for infected paper cuts.
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The word "fiscal" is derived from a Latin word meaning "moneybag."
"No amount of business school training or work experience can teach what is ultimately a matter of personal character. "

-- Truett Cathy, Chick-fil-A Inc. founder

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