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ZERO-SUM GAME: A situation in which a fixed amount is divided up among the winners and losers. In a zero-sum game the wins equal the losses. Many stock market, or financial market, exchanges are zero-sum. One person buys low and sells high, while another buys high and sells low. The wealth in such transactions are merely transferred from one person to another. "Productive" market transactions, in contrast, are not zero-sum. The act of producing goods and services from resources that are consumed to satisfy wants and needs results in a net gain to society.

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Lesson 13: Aggregate Demand | Unit 3: The Curve Page: 15 of 22

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  • The basic setup, shape, and position of the aggregate demand curve on a graph. The AD curve shows the negative relationship between the price level and real GDP.
  • What causes the negative slope of the AD curve--namely: 1) the real-balance effect, 2) the interest-rate effect, and 3) the net-export effect.
  • Why the real-balance effect means that a higher (or lower) price level reduces (or increases) the purchasing power of money, resulting in less (or more) real production purchased.
  • Why the interest-rate effect means that a higher (or lower) price level leads to higher (or lower) interest rates and thus a higher (or lower) cost of borrowing which decreases (or increases) consumption and investment expenditures on real production.
  • Why the net-export effect means that a higher (or lower) price level decreases (or increases) exports and increases (or decreases) imports thus decreasing (or increasing) net export expenditures on real production.

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MARGINAL FACTOR COST CURVE, PERFECT COMPETITION

A curve that graphically represents the relation between marginal factor cost incurred by a perfectly competitive firm for hiring an input and the quantity of input employed. A profit-maximizing perfectly competitive firm hires the quantity of input found at the intersection of the marginal factor cost curve and marginal revenue product curve. The marginal factor cost curve for a perfectly competitive firm with no market control is horizontal.

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