CIRCULAR FLOW DIAGRAM
The important thing to take away from this is to relate it to an economic recession. During the last economic recession, Obama told people to go out and spend their money, but consumers weren’t making as much money so they wanted to save instead. According to the circular flow diagram, people should have been going out and spending their money instead of saving it.
Positive versus Normative Statements
The best way to understand positive and normative statements is to look at some examples.
- “Higher taxes on cigarettes will reduce smoking.” Positive
- “This means that we should increase taxes on cigarettes.” Normative
- “No, cigarette taxes are already too high.” Normative
Remember, positive statements can be tested!
Here are some tools to help you with the supply and demand and price control problems:
Reasons to shift Demand Curve:
- Change in tastes and preference of the consumer.
- Change in income; normal or inferior good.
- Change in the prices of other goods; complements or substitutes in consumption.
- Change in the number of consumers (population).
Reasons to shift the Supply Curve:
- Change in the costs of production i.e. the cost of inputs (parts) of the good, better technology, taxes.
- Change in the number of producers (size of the market).
- Change in prices of other goods. i.e. substitutes or complements in production.
- Changes in nature; expectations.
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