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ACCELERATOR: The ratio between investment expenditures and the change in gross domestic product. This is based on the notion that business investment depends on the rate of growth of aggregate output. If the economy is expanding, in other words, then the business sector invests in more capital goods to produce the extra output needed. This accelerator effect modifies and magnifies the simply multiplier effect based on the induced consumption and the marginal propensity to consume.

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Lesson 1: Economic Basics | Unit 3: The Economy Page: 8 of 18

Topic: A Mixed Economy: Markets and Government <=PAGE BACK | PAGE NEXT=>

Markets do an effective (and efficient) job of answering the three questions of allocation--most of the time.
  • Markets are the VOLUNTARY exchange of goods and services.
  • A pure market economy is an economy that uses nothing but markets to allocate resources.
  • A pure market economy is a useful theoretical benchmark.
Market responses to the allocation questions:
  • What? Resources are used to produce goods with the highest prices.
  • How? Goods are produced using the combination of resource with the lowest prices.
  • For Whom? People with more income buy more goods.

Government also helps answer the three questions of allocation.
  • Government allocation is INVOLUNTARY. It sets the laws and rules.
  • A pure command economy is an economy that uses nothing but government to allocate resources.
  • A pure command economy is another useful theoretical benchmark.
Government responses to the allocation questions:
  • What? When government spends taxes, it dictates what goods will be produced.
  • How? Government has laws and rules that specify how resources will be used to produce goods.
  • For Whom? Government collects taxes from some people and distributes them among other people.

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MARGINAL REVENUE PRODUCT

The change in total revenue resulting from a unit change in a variable input, keeping all other inputs unchanged. Marginal revenue product, usually abbreviated MRP, is found by dividing the change in total revenue by the change in the variable input or by multiplying marginal physical product by marginal revenue. This is also termed value of the marginal product. Marginal revenue product is a key concept for understanding the demand for productive inputs.

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One of the largest markets for gold in the United States is the manufacturing of class rings.
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