Suppose the price of coffee is $6 per pound. If this price is an absolute price, what is meant by the phrase "$6 per pound"? If this price is a relative price, what is meant by the phrase "$6 per pound"?
What will be an ideal response?
When absolute prices are used, the term dollar simply means the green pieces of paper used for currency in the U.S. If the absolute price of coffee is $6 per pound, this means that the buyer must sacrifice $6 in currency to purchase 1 pound of coffee. When relative prices are used, the term dollar is a convenient shorthand for a representative collection of other goods available in the economy. If the relative price of coffee is $6 per pound, this means that the buyer can trade 6 units of other goods in exchange for 1 pound of coffee.
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