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SECOND RULE OF SUBJECTIVITY: The second of seven basic rules of the economy. It is the notion that market prices are ultimately determined by subjective values and preferences of buyers and resource owners. While regular, everyday consumers are prone to accept the prices "set" by retail stores and other sellers as etched in stone (perhaps along with the Biblical ten commandments), such is not the case. The price of a product depends on two things, demand (especially the demand price that buyers are willing to pay) and supply (especially the supply price that sellers are willing to accept). Both, I repeat both, are subjectively determined. By subjective, I mean they are based on the values, beliefs, tastes, and preferences of people.

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Lesson 14: Aggregate Supply | Unit 4: Determinants Page: 15 of 20

Topic: Quality of Resources <=PAGE BACK | PAGE NEXT=>

Resource quality tends to change slowly and gradually. We seldom see big jumps in these long run aggregate supply determinants.

Two ways to improve resource quality:

  • Technology: The information about production techniques. It generally moves forward, so that aggregate supply increases. Technology primarily affects capital and land.
  • Education: Transferring information, knowledge, and training to people. It also generally moves forward, increasing aggregate supply. Education is most important for labor.
Resource quality generally increases, but it can decrease in unusual circumstances.

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BUYERS' INCOME, DEMAND DETERMINANT

The income that buyers have available to purchase a good, which is assumed constant when a demand curve is constructed. Buyers' income is one of five demand determinants that shift the demand curve when they change. The other four are buyers' preferences, other prices, buyers' expectations, and number of buyers.

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Today, you are likely to spend a great deal of time wandering around the downtown area looking to buy either handcrafted decorations to hang on your walls or throw pillows for your bed. Be on the lookout for high interest rates.
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In 1914, Ford paid workers who were age 22 or older $5 per day -- double the average wage offered by other car factories.
"Act well at the moment, and you have performed a good action for all eternity."

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