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INCOME CHANGE, UTILITY ANALYSIS: A disruption of consumer equilibrium identified with utility analysis caused by changes in the buyers' income, which results in a change in the quantities of the goods consumed. The change in buyers' income alters the income constraint and forces a reevaluation of the rule of consumer equilibrium.

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Lesson 16: Aggregate Shocks | Unit 2: Extension Page: 5 of 21

Topic: Self-Correction <=PAGE BACK | PAGE NEXT=>

The aggregate market has a perpetual inclination to adjust from short-run equilibrium to long-run equilibrium.
  • The aggregate market self-correction mechanism relies on wages, the key production cost determinant.
  • Short-run labor market imbalances induce wage changes that move the aggregate market to long-run equilibrium.

A recessionary gap Unemployment causes lower wages and production costs, and an increase in short-run aggregate supply.

An inflationary gap Labor market imbalances increase wages and production cost, and decrease in short-run aggregate supply.

Long run equilibrium is restored in both cases.


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ALLOCATION

The process of distributing resources for the production of goods and services, and of distributing goods and services for the satisfaction of wants and needs and human consumption. This allocation process is an essential part of an economy's effort to address the problem of scarcity.

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Today, you are likely to spend a great deal of time driving to a factory outlet wanting to buy either several magazines on home repairs or a remote controlled sports car with an air spoiler. Be on the lookout for slightly overweight pizza delivery guys.
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In the Middle Ages, pepper was used for bartering, and it was often more valuable and stable in value than gold.
"Most of the things worth doing in the world had been declared impossible before they were done."

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