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BARTER ECONOMY: An economy that trades goods and services using barter exchanges rather than money. Barter economies originally predated the invention of money, emerging out the early stage of self-sufficiency before giving way to the use of commodity money. However, barter economies occasionally surface in modern times, especially when the public loses confidence in the monetary unit during a government crises or a period of hyperinflation.

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Lesson 4: Production Possibilities | Unit 1: Getting Started Page: 2 of 24

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

Every economic analysis builds on certain preconditions or assumptions. Assumptions, whether reasonable or seemingly unrealistic, let us:
  1. Establish abstract benchmarks for comparison or
  2. Break an analysis into simpler, more easily manageable parts.

Four key assumptions:

  • Two Goods: Resources are used to produce one or both of only two goods. This is a simplifying assumption that lets us display graphs on the screen.
  • Fixed Resources: The quantities of the labor, capital, land, and entrepreneurship resources do not change. This is a reasonable assumption that we can change to analysis resource changes.
  • Fixed Technology: The information and knowledge that society has about the production of goods and services is fixed. This is another reasonable assumption that we can change to analysis technology changes.
  • Technical Efficiency: Resources are used in a technically efficient way. We get the maximum possible production out of the resource inputs.

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LONG-RUN AGGREGATE SUPPLY CURVE

A graphical representation of the long-run relation between real production and the price level, holding all ceteris paribus aggregate supply determinants constant. The long-run aggregate supply curve, abbreviated LRAS, is one of two curves that graphically capture the supply-side of the aggregate market. The other is the short-run aggregate supply curve. The demand-side of the aggregate market is occupied by the aggregate demand curve. The vertical long-run aggregate supply curve captures the independent relation between real production and the price level that exists in the long run.

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