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AGGREGATE DEMAND CURVE: A graphical representation of the relation between aggregate expenditures on real production and the price level, holding all ceteris paribus aggregate demand determinants constant. The aggregate demand, or AD, curve is one side of the graphical presentation of the aggregate market. The other side is occupied by the aggregate supply curve (which is actually two curves, the long-run aggregate supply curve and the short-run aggregate supply curve). The negative slope of the aggregate demand curve captures the inverse relation between aggregate expenditures on real production and the price level. This negative slope is attributable to the interest-rate effect, real-balance effect, and net-export effect.

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Lesson 5: Demand | Unit 2: Law of Demand Page: 5 of 20

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

The law of demand is the basic principle underlying demand, one of our most important economic laws.

A definition:

The law of demand is an inverse relationship between demand price and the quantity demanded, ceteris paribus.

  • Inverse relationship means that people buy more of a good if the price is lower and less if the price is higher.
  • In terms of scientific method, price causes quantity demanded. A change in the price causes a change in the quantity demanded.
Ceteris paribus is important to the law of demand.
  • Ceteris paribus means other things remain unchanged.
  • Law of demand applies exclusively to the relationship between demand price and quantity demanded.
  • All other things that can affect demand must remain constant to avoid distorting this relationship.
  • Because demand is affected by many factors other than price, a buyer may buy larger amounts of a good even with a higher price.
  • Other factors that affect demand are called demand determinants.

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MODEL

An abstract representation of the real world that is usually based on scientific theories, principles, and hypotheses. A model is used to analyze economic phenomena by focusing on a small number of essential aspects of the real world. It is then manipulated to derive conclusions and implications that can be applied to the real world.

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Today, you are likely to spend a great deal of time watching the shopping channel hoping to buy either a T-shirt commemorating last Friday (you know why) or a rotisserie oven that can also toast bread. Be on the lookout for bottles of barbeque sauce that act TOO innocent.
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Post WWI induced hyperinflation in German in the early 1900s raised prices by 726 million times from 1918 to 1923.
"Wherever you go, no matter what the weather, always bring your own sunshine."

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