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WILLINGNESS TO PAY: The price or dollar amount that someone is willing to give up or pay to acquire a good or service. Willingness to pay is the source of the demand price of a good. However, unlike demand price, in which buyers are on the spot of actually giving up the payment, willingness to pay does not require an actual payment. This concept is important to benefit-cost analysis, welfare economics, and efficiency criteria, especially Kaldor-Hicks efficiency. A related concept is willingness to accept.

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Lesson 11: Circular Flow | Unit 2: Financial Markets Page: 8 of 22

Topic: Saving <=PAGE BACK | PAGE NEXT=>

Saving is a nonconsumption use of income, making a loan or supplying income to the financial markets in exchange for a legal claim.
  • The red financial markets box is a third set of aggregate markets.
  • The green flow is saving supplied to the financial markets. It is income diverted from the household sector.
Why save?
  • To get paid. Interest is the payment for using income.
  • Income is needed later more than now. Income is set aside this year to buy more production next year.
Saving does not disappear, it is income diverted away from the consumption flow and supplied, or loaned, to the financial markets.

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PERFECT COMPETITION, LONG-RUN PRODUCTION ANALYSIS

In the long run, a perfectly competitive firm adjusts plant size, or the quantity of capital, to maximize long-run profit. In addition, the entry and exit of firms into and out of a perfectly competitive market guarantees that each perfectly competitive firm earns nothing more or less than a normal profit. As a perfectly competitive industry reacts to changes in demand, it traces out positive, negative, or horizontal long-run supply curve due to increasing, decreasing, or constant cost.

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