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ADJUSTMENT, SHORT-RUN AGGREGATE MARKET: Disequilibrium in the short-run aggregate market induces changes in the price level that restore equilibrium. If the price level is above the short-run equilibrium price level, economy-wide product market surpluses cause the price level to fall. If the price level is below the short-run equilibrium price level, economy-wide product market shortages cause the price level to rise. In both cases short-run equilibrium is restored. You might want to compare adjustment, long-run aggregate market. Price level changes induce changes in both aggregate expenditures and real production. Unlike the long-run aggregate market, changes in the price level can induce changes in short-run aggregate supply, making it greater or less than full-employment real production.

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Lesson 5: Market 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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ELASTICITY ALTERNATIVES

Five categories of elasticity that form a continuum indicating the relative responsiveness of a change in one variable (usually quantity demanded or quantity supplied) to a change in another variable (usually price). These five alternatives--perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic--are most often used to categorize the price elasticity of demand and the price elasticity of supply.

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Today, you are likely to spend a great deal of time flipping through mail order catalogs seeking to buy either semi-gloss photo paper that works with your neighbor's printer or a birthday gift for your father that doesn't look like every other birthday gift for your father. Be on the lookout for gnomes hiding in cypress trees.
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The average bank teller loses about $250 every year.
"I think luck is the sense to recognize an opportunity and the ability to take advantage of it . The man who can smile at his breaks and grabs his chance gets on."

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