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MARKET: The organized exchange of commodities (goods, services, or resources) between buyers and sellers within a specific geographic area and during a given period of time. Markets are the exchange between buyers who want a good--the demand-side of the market--and the sellers who have it--the supply--side of the market. In essence, a buyer gives up money and gets a good, while a seller gives up a good and gets money. From a marketing context, in order to be a market the following conditions must exist. The target consumers must have the ability to purchase the goods or services. They must have a need or desire to purchase. The target group must be willing to exchange something of value for the product. Finally, they must have the authority to make the purchase. If all these variables are present, a market exits.

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Lesson 16: Aggregate Shocks | Unit 4: Complex Shifts Page: 13 of 21

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

Our analysis of AD-curve-induced aggregate market adjustment from one equilibrium to another is more complex when we include the self-correction mechanism from the short run to the long run.

Two cases:

  • Aggregate demand increases.
  • Aggregate demand decreases.

The complex adjustment is a two step process:

  • First: The AD curve shifts, which leads to a short-run equilibrium and moves the aggregate market away from the long-run equilibrium.
  • Second: Wages adjust to achieve equilibrium in the labor market--eventually--which changes production costs, shifts the SRAS, and restores long-run equilibrium.

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INDUCED GOVERNMENT PURCHASES

Government purchases that depend on income or production (especially national income and gross domestic product). That is, changes in income induce changes in government purchases. Induced government purchases reflect the observation that the government sector (especially state and local governments) is inclined to use tax revenue, which increases with income, for purchases. They are measured by the marginal propensity for government purchases (MPG) and are reflected by the positive slope of government purchases line. The alternative to induced government purchases is autonomous government purchases, which do not depend on income.

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