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INCOME-PRICE MODEL: An economic model relating the price level (the price part) and real production (the income part) that is used to analyze business cycles, aggregate production, unemployment, inflation, stabilization policies, and related macroeconomic phenomena. The income-price model, inspired by the standard market model, captures the interaction between aggregate demand (the buyers) and short-run and long-run aggregate supply (the sellers).

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Lesson 6: Supply | Unit 2: Law of Supply Page: 5 of 19

Topic: Definition <=PAGE BACK | PAGE NEXT=>

The law of supply is the basic principle underlying supply.

A definition:

The law of supply is a direct relationship between supply price and the quantity supplied, ceteris paribus.

  • Direct relationship means that people sell more of a good if the price is higher and less if the price is lower.
  • The law of supply is not as rigid as the law of demand. The price and the quantity supplied are not always directly related. Higher prices could cause an increase or a decrease in the quantity supplied.
Ceteris paribus is also important to the law of supply.
  • Ceteris paribus means other things remain unchanged.
  • Law of supply applies exclusively to the relationship between supply price and quantity supplied.
  • All other things that can affect supply must remain constant to avoid distorting this relationship.
  • Because supply is affected by many factors other than price, the price/quantity supply relationship can get lost when other things change.
  • Other factors that affect supply are called supply determinants.

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MARGINAL REVENUE CURVE, MONOPOLY

A curve that graphically represents the relation between the marginal revenue received by a monopoly for selling its output and the quantity of output sold. Because a monopoly is a price maker and faces a negatively-sloped demand curve, its marginal revenue curve is also negatively sloped and lies below its average revenue (and demand) curve. A monopoly maximizes profit by producing the quantity of output found at the intersection of the marginal revenue curve and marginal cost curve.

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Today, you are likely to spend a great deal of time browsing through a long list of dot com websites trying to buy either a coffee cup commemorating yesterday or a replacement remote control for your television. Be on the lookout for celebrities who speak directly to you through your television.
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Woodrow Wilson's portrait adorned the $100,000 bill that was removed from circulation in 1929. Woodrow Wilson was removed from circulation in 1924.
"Progress always involves risk. You can't steal second base and keep your foot on first. "

-- Frederick B. Wilcox

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Brookings Papers on Economic Activity
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