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ASSUMPTION: An initial condition or statement that sets the stage for an analysis by abstracting from the real world. Assumptions are important to economic theories and economic analysis. Some assumptions are used to simplify a complex analysis into more easily manageable parts. These establish idealistic benchmarks that can be used to evaluate real world conditions. Other assumptions are used as control conditions that are subsequently changed to evaluate the effect of the change. The use of ceteris paribus assumptions in comparative statics analysis is an excellent example.

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Lesson 8: Market Shocks | Unit 3: Single Shifts Page: 8 of 20

Topic: More Demand <=PAGE BACK | PAGE NEXT=>

An increase in demand caused by one of the demand determinants.
  • Initial equilibrium market at price Po and quantity Qo
  • Buyers acquire a sudden "appetite" for hot fudge sundaes.
A summary:
  • The demand curve shifts rightward.
  • The initial equilibrium is no longer an equilibrium.
  • The new equilibrium is at the intersection of the original supply curve with the new demand curve.
  • New equilibrium price is P1 and new equilibrium quantity is Q1.
The six steps of market adjustment for an increase in demand:
  • A determinant changes. We have a greater appetite for hot fudge sundaes.
  • A curve to shifts. The demand curve for hot fudge sundaes shifts rightward.
  • A shortage or a surplus occurs. The increase in demand causes a shortage of hot fudge sundaes.
  • The price changes. The price of hot fudge sundaes goes up.
  • The quantities demanded and supplied change. The quantity supplied for hot fudge sundaes increases while their quantity demand is reduced.
  • The market imbalance is eliminated and equilibrium is restored. The shortage of hot fudge sundaes is eliminated. The price is higher and the quantity exchanged is more.

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ABSOLUTE ADVANTAGE

The general ability to produce more goods or services using fewer resources. A person or country has an absolute advantage in production largely due to superior technology or greater technical efficiency. A related, but contrasting concept is comparative advantage. Both terms are perhaps most important to the study of international trade, but also provide insight into other exchanges.

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Today, you are likely to spend a great deal of time searching the newspaper want ads seeking to buy either a genuine down-filled comforter or a 200-foot blue garden hose. Be on the lookout for poorly written technical manuals.
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