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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 10: Utility and Demand | Unit 2: A Simple Choice Page: 5 of 21

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  • The question of the day is: How much, if any, time should I spend at the beach?

  • No Constraints

  • If the price of beach frolicking is zero or if have nothing better to do with my time and more than enough income to buy all of the beach frolicking that I want, the choice is relatively simple.

    • I achieve utility maximization by spending the number of hours at the beach that generates the highest level of utility. That number is 6 or 7 hours and the total utility generated is 42 utils.

    • Spending any more or less time generates less total utility.

    • Even though I can afford to spend all day at the beach (8 hours), I won't. The total utility of 8 hours is less than that for 6 or 7 hours.

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LAISSEZ FAIRE

The notion that government should not intervene into production, consumption, and exchange activities and that the private sector (households and businesses) should be free to make allocation decisions. Laissez faire is a French term that roughly translates into "allow to act." It has been the rallying cry for many people (primarily business leaders) who oppose government intervention, regulation, or even taxation since it was popularized in the late 1700s by Adam Smith in The Wealth of Nations.

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