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AGGREGATE EXPENDITURES LINE: A line representing the relation between aggregate expenditures and gross domestic product used in the Keynesian cross. The aggregate expenditure line is obtained by adding investment expenditures, government purchases, and net exports to the consumption line. As such, the slope of the aggregate expenditure line is largely based on the slope of the consumption line (which is the marginal propensity to consume), with adjustments coming from the marginal propensity to invest, the marginal propensity for government purchases, and the marginal propensity to import. The intersection of the aggregate expenditures line and the 45-degree line identifies the equilibrium level of output in the Keynesian cross.

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Lesson 5: Market 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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INCOME ELASTICITY OF DEMAND

The relative response of a change in demand to a change in income. More specifically the income elasticity of demand is the percentage change in demand due to a percentage change in buyers' income. This notion of elasticity captures the buyers' income demand determinant. Three other notable elasticities are the price elasticity of demand, the price elasticity of supply, and the cross elasticity of demand.

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Today, you are likely to spend a great deal of time wandering around the downtown area hoping to buy either a turbo-powered vacuum cleaner or a battery-powered, rechargeable vacuum cleaner. Be on the lookout for the last item on a shelf.
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The earliest known use of paper currency was about 1270 in China during the rule of Kubla Khan.
"Good judgment comes from experience, and often experience comes from bad judgment."

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