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LERNER INDEX: The difference between price (p) and marginal cost (mc) as a fraction of price, that is [p-mc]/p. The Lerner index is usually taken as an indicator of market power because the larger the index, the larger the difference between price and marginal cost, that is, the larger the distance between the price and the competitive price. The Lerner index depends on the elasticity of demand. The Lerner index is also called the price-cost margin.

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Lesson 14: Production | Unit 4: Long-Run Production Page: 18 of 25

Topic: Returns To Scale <=PAGE BACK | PAGE NEXT=>

  • The key principle guiding long-run production is returns to scale.

  • Returns to scale are the changes in production that results when all resources are change proportionally in the long run.
  • Firms typically operate in one of three returns to scale alternatives:

    • Increasing returns to scale

    • Decreasing returns to scale

    • Constant returns to scale

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AGGREGATE DEMAND SHIFTS

Changes in the aggregate demand determinants cause the aggregate demand curve to shift. The mechanism is comparable to that for market demand determinants and market demand. There are two alternatives--an increase in aggregate demand and a decrease in aggregate demand. An increase in spending by any of the four sectors--household, business, government, and foreign--shifts the aggregate demand curve to right. A decrease in spending by these four sectors shifts the aggregate demand curve to left.

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On a typical day, the United States Mint produces over $1 million worth of dimes.
"It is not the straining for great things that is most effective; it is the doing of the little things, the common duties, a little better and better."

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