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RISK POOLING: Combining the uncertainty of individuals into a calculable risk for large groups. For example, you may or may not contract the flu this year. However, if you're thrown in with 99,999 other people, then health-care types who spend their lives measuring the odds of an illness, can predict that 1 percent of the group, or 1,000 people, will get the flu. The uncertainty is that they probably don't know which 1,000 people, they only know the number afflicted. This little bit of information is what makes risk pooling possible. If the cost is $50 per illness, then an insurance company can insure your 100,000-member group against flu if they collect $50,000 ($50 x 1,000 sick people), or 50 cents per person. By agreeing to pay the cost of each sick person in exchange for the 50 cent payments, the insurance company has effectively pooled the risk of the group.

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Lesson 13: Aggregate Demand | Unit 2: Doing More Page: 9 of 22

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  • The four expenditures that make up aggregate demand: consumption, investment, government purchases, and net export expenditures.
  • How consumption expenditures are made by households on services, durable goods, and nondurable goods.
  • How investment expenditures are made by businesses on inventories, equipment, and fixed structures.
  • How only government purchases of final goods and services qualify as expenditures for aggregate demand.
  • Net exports, which are exports minus imports. Net exports represent the net expenditures of the foreign sector on our domestically produced final goods and services.

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LONG-RUN MARGINAL COST

The change in the long-run total cost of producing a good or service resulting from a change in the quantity of output produced. Like all marginals, long-run marginal cost is an increment of the corresponding total. It is the change in long-run total cost divided by, or resulting from, a change in quantity. Long-run marginal cost is guided by returns to scale rather than marginal returns.

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