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FIFTH RULE OF IMPERFECTION: The fifth of seven basic rules of the economy. It is the observation that the real world is not perfect. This means markets often fail to achieve efficiency because of several failings. This also means that government seldom enacts the policies needed to correct market failings. We are usually faced with the lesser of evils.

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Lesson 11: Circular Flow | Unit 2: Financial Markets Page: 7 of 22

Topic: The Paper Economy <=PAGE BACK | PAGE NEXT=>

Financial markets divert national income from household consumption to business investment.
  • Real side: Goods and resources, physical production used to satisfy wants and needs.
  • Paper side: Legal claims on these physical goods and resources. Examples: Corporate stocks, government bonds, money, bank statements, mortgage contracts.
  • Trading legal claims through financial markets diverts income from consumption to investment.
  • A legal claim buyer gets the legal claim, but gives up income. The legal claim seller gives up the claim and takes possession of the income.
  • Income is diverted from a legal claim buyer (lender, saver) to a legal claim seller (borrower) through the financial markets.Two additional flows: Saving and Investment.

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PREFERENCES CHANGE, UTILITY ANALYSIS

A disruption of consumer equilibrium identified with utility analysis caused by changes in the preferences for a good, which likely results in a change in the quantities of the goods consumed. The change in preferences alters the marginal utility-price ratio and forces a reevaluation of the rule of consumer equilibrium.

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APLS

BROWN PRAGMATOX
[What's This?]

Today, you are likely to spend a great deal of time flipping through the yellow pages wanting to buy either a wall poster commemorating the first day of spring or a lazy Susan for you dining room table. Be on the lookout for rusty deck screws.
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This isn't me! What am I?

A half gallon milk jug holds about $50 in pennies.
"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

WACM
Weak Axiom of Cost Minimization
A PEDestrian's Guide
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