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FACTOR MARKET, EFFICIENCY: A factor market achieves efficiency in the allocation of resources by equating marginal revenue product to factor price. Perfect competition, as the efficiency benchmark, is the only market structure to satisfy this criterion and achieve factor market efficiency. Monopsony, oligopsony, and monopsonistic competition are inefficient because they equate marginal revenue product to marginal factor cost, both of which are greater than factor price.

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Lesson 15: Aggregate Market | Unit 2: Equilibrium Page: 7 of 22

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Equilibrium in the aggregate market occurs when the forces of aggregate demand and aggregate supply are balanced.
  • Equilibrium is a balance of forces that will remain unchanged until some other, outside force intervenes.
  • For the market, the forces are supply and demand. For the aggregate market, the forces are aggregate demand and aggregate supply.
  • The aggregate demand force is our four sectors who want GDP at the lowest price level possible.
  • The aggregate supply force is our scarce resources who want to sell GDP at the highest prices possible.

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REAL-BALANCE EFFECT

A change in aggregate expenditures on real production made by the household, business, government, and foreign sectors that results because a change in the price level alters the purchasing power of money. This is one of three effects underlying the negative slope of the aggregate demand curve associated with a movement along the aggregate demand curve and a change in aggregate expenditures. The other two are interest-rate effect and net-export effect. The real-balance effect is somewhat analogous to the income effect underlying the negative slope of the market demand curve.

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