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MARGINAL UTILITY AND DEMAND: An explanation of the law of demand and the negatively-sloped demand curve can be found in the analysis of marginal utility and especially the law of diminishing marginal utility. This explanation rests on two propositions. One, the law of diminishing marginal utility means that the marginal utility obtained from consuming a good declines as the quantity consumed increases. Two, the marginal utility of a good underlies the demand price that buyers are willing and able to pay for a good. When combined, these two propositions indicate that the demand price buyers are willing and able to pay for a good declines as the quantity demanded (and consumed) increases. And this is the law of demand.

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Lesson 16: Aggregate Shocks | Unit 1: Instability Page: 2 of 21

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

Our goal is to explain business cycle fluctuations.
  • The real GDP path the economy would take with long-run equilibrium--at full employment--is the straight, green upward-sloping line.
  • The actual real GDP path, the jagged red line, tends to be less smooth.
  • The business cycle is the movement above and below the long-run trend.
  • When the actual is below the long-run equilibrium line, we get unemployment.
  • When the actual is above the long-run equilibrium line, we get inflation.
  • Ceteris paribus factors are what create fluctuations away from the long-run trend.
  • Aggregate demand determinants are the main cause.

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LOSS MINIMIZATION RULE

A rule stating that a firm minimizes economic loss by producing output in the short run that equates marginal revenue and marginal cost if price is less than average total cost but greater than average variable cost. This is one of three short-run production alternatives facing a firm. The other two are profit maximization (if price exceeds average total cost) and shutdown (if price is less than average variable cost).

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Today, you are likely to spend a great deal of time at the confiscated property police auction seeking to buy either a flower arrangement for that special day for your mother or a New York Yankees baseball cap. Be on the lookout for slow moving vehicles with darkened windows.
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Parker Brothers, the folks who produce the Monopoly board game, prints more Monopoly money each year than real currency printed by the U.S. government.
"Being defeated is only a temporary condition; giving up is what makes it permanent."

-- Marilyn vos Savant, Author

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