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INSURANCE: Transferring risk to others. The need for insurance occurs because people tend to be risk averse in many circumstances. As such, most of us are willing to pay for certainty. Those who satisfy this need for insurance, insurance companies for example, do so because they can pool risk. If insurance companies know the chance of some loss (an accident, illness, or whatever) and its cost, then they can divide this cost among a large group of risk averse types. The insurance company agrees to pay the cost of the loss and each of the risk averse types pay a risk premium, but get the peace of mind that goes with certainty.

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Lesson 7: Market | Unit 1: The Exchange Page: 2 of 22

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

Equilibrium is the balance of opposing forces that remains unchanged until another force intervenes.

For example:

If two people are pushing in opposite ways on a swinging door with equal strength, then neither will be able to go through. Each pusher represents an opposing force.

For a market, the opposing forces are:

  • Demand. Buyers want to pay a lower price.
  • Supply. Sellers want to receive a higher price.
Market equilibrium is indicated by equilibrium quantity and equilibrium price.
  • Equilibrium quantity is the quantity of a good traded among buyers and sellers when a market is in equilibrium.
  • Equilibrium price is the price agreed to by buyers and sellers when a market is in equilibrium.
  • Buyers and sellers will continue to trade the equilibrium quantity at the equilibrium price indefinitely.
  • But, the equilibrium quantity and price can be disrupted by ceteris paribus determinants of demand and supply. Analyzing these disruptions help us understand economic events.

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ASSUMPTION

An initial condition or statement of a model or theory that sets the stage for an analysis by abstracting from the real world. Assumptions are important to economic analysis. Some assumptions are used to simplify a complex analysis into more easily manageable parts. Other assumptions are used as control conditions that are subsequently changed to evaluate the consequences.

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In the early 1900s around 300 automobile companies operated in the United States.
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