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LAW OF DEMAND: The inverse relationship between demand price and the quantity demanded, ceteris paribus. This fundamental economic principle indicates that as the price of a commodity decreases, then the quantity of the commodity that buyers are able and willing to purchase in a given period of time, if other factors are held constant, increases. This law is incredibly important to the study of economics. If you compiled a top ten list of economically important laws, the law of demand would be right there at the top.

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Lesson 9: Consumer Demand | Unit 3: Marginal Utility Page: 14 of 22

Topic: Diamond-Water Paradox <=PAGE BACK | PAGE NEXT=>

  • The diamond-water paradox is the perplexing observation that water, which is more useful that diamonds, has a lower price than diamonds. If price is related to utility, it seems that water would have a higher price than diamonds, not lower.

  • This paradox actual serves to illustrate the difference between total utility and marginal utility.
  • The most important implication from the diamond-water paradox is that price is related to marginal utility not total utility.

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INFLATIONARY GAP, KEYNESIAN MODEL

The difference between equilibrium aggregate production achieved in the Keynesian model and full-employment aggregate production that occurs when equilibrium aggregate production is greater than full-employment aggregate production. An inflationary gap, also termed an expansionary gap, is associated with a business-cycle expansion. The prescribed Keynesian remedy for an inflationary gap is contractionary fiscal policy. This is one of two alternative output gaps that can occur when equilibrium generates production that differs from full employment. The other is a recessionary gap.

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