Budget Constraint

When consumers’ income limits their consumption behaviors, this is known as a budget constraint. In other words, it’s all of the many combinations of goods/services that consumers are able to purchase in light of their particular income as well as the current prices of these particular goods/services.In the short term, budget constraints can be…
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The Multiplier Effect

The Multiplier Effect is defined as the change in income to the permanent change in the flow of expenditure that caused it. In other words, the multiplier effect refers to the increase in final income arising from any new injections.Injections are additions to the economy through government spending, money from exports, and investments made by…
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Monopolistic Competition

In Monopolistic Competition, there are many small firms who all have minimal shares of the market. Firms have many competitors, but each one sells a slightly different product. Firms are neither price takers (perfect competition) nor price makers (monopolies).Example of Monopolistic Competition The athletic shoe market:When you walk into…
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Money Multiplier

The money multiplier describes how an initial deposit leads to a greater final increase in the total money supply. Also known as “monetary multiplier,” it represents the largest degree to which the money supply is influenced by changes in the quantity of deposits. It identifies the ratio of decrease and/or increase in the money supply in relation…
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Profit Maximization Rule

The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR.Profit Maximization Rule FormulaThe profit maximization formula…
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Free Market

A free market economy is a type of economy that promotes the production and sale of goods and services, with little to no control or involvement from any central government agency. In a free market economy, firms and households act in self-interest to determine how resources get allocated, what goods get produced, and who buys the goods. A free…
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