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ORDINAL: A measurement based on a ranking, such as first, second, and third, that enables a relative comparison of more or less. Relative comparability means, for example, that first is more than second and second is more than third, but how much more is not known. Cardinal measures, which use a quantitative measurement scale, is an alternative type of measure. An ordinal measure can be thought of as a list for high to low, good to bad, top to bottom, and are often based on subjective evaluations of items. The notion of ordinal measurement is most often seen in the economic analysis of indifference curves and utility.

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Lesson 5: Demand | Unit 2: Law of Demand Page: 7 of 20

Topic: Substitution Effect <=PAGE BACK | PAGE NEXT=>

The second reason for the law of demand is the substitution effect.
  • The substitution effect exists because a change in the price of a good makes this price relatively higher or lower than the prices of other goods.
  • The higher the price of a good, then the more expensive it is relative to other goods. The lower the price of a good, then the less expensive it is relative to other goods.
  • Other prices remain unchanged.
  • The substitution effect is usually more important than the income effect.

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INFLATION CAUSES

Inflation, the persistent increase in the average price level, can be caused by an increase in aggregate demand or a decrease in aggregate supply. This suggests two basics sources, causes, or types of inflation--demand-pull inflation and cost-push inflation. While short-term bouts of inflation (up to several months) can result from anything (determinant) that might cause either increases in aggregate demand or decreases in aggregate supply, long-term inflation (a year or more) is possible ONLY through persistent increases in the money supply. As such, while demand-pull inflation and cost-push inflation are convenient ways to catalog the transmission mechanisms of inflation, the ultimate CAUSE of inflation is money.

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