Macro Chapter03

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PART I INTRODUCTION TO ECONOMICS

Demand, Supply, and
Market Equilibrium

3

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster

PART I INTRODUCTION TO ECONOMICS

CHAPTER 3 Demand, Supply, and Market Equilibrium

Demand, Supply, and
Market Equilibrium

3
CHAPTER OUTLINE
Firms and Households: The Basic
Decision-Making Units
Input Markets and Output Markets: The
Circular Flow
Demand in Product/Output Markets
Changes in Quantity Demanded versus Changes
in Demand
Price and Quantity Demanded: The Law of
Demand
Other Determinants of Household Demand
Shift of Demand versus Movement Along the
Demand Curve
From Household Demand to Market Demand
Supply in Product/Output Markets
Price and Quantity Supplied: The Law of Supply
Other Determinants of Supply
Shift of Supply versus Movement Along the
Supply Curve
From Individual Supply to Market Supply
Market Equilibrium
Excess Demand
Excess Supply
Changes in Equilibrium
Demand and Supply in Product Markets: A
Review
Looking Ahead: Markets and the
Allocation of Resources

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster

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CHAPTER 3 Demand, Supply, and Market Equilibrium

Firms and Households: The Basic Decision-Making Units

firm An organization that transforms resources
(inputs) into products (outputs). Firms are the
primary producing units in a market economy.
entrepreneur A person who organizes, manages,
and assumes the risks of a firm, taking a new idea
or a new product and turning it into a successful
business.
households The consuming units in an economy.

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster

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CHAPTER 3 Demand, Supply, and Market Equilibrium

Input Markets and Output Markets: The Circular Flow

product or output markets The markets in which
goods and services are exchanged.
input or factor markets The markets in which the
resources used to produce products are
exchanged.

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster

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Input Markets and Output Markets: The Circular Flow

CHAPTER 3 Demand, Supply, and Market Equilibrium

 FIGURE 3.1 The Circular Flow of
Economic Activity

Diagrams like this one show the
circular flow of economic activity,
hence the name circular flow
diagram. Here goods and
services flow clockwise: Labor
services supplied by households
flow to firms, and goods and
services produced by firms flow
to households.
Payment (usually money) flows
in the opposite
(counterclockwise) direction:
Payment for goods and services
flows from households to firms,
and payment for labor services
flows from firms to households.
Note: Color Guide—In Figure 3.1
households are depicted in blue and
firms are depicted in red. From now on
all diagrams relating to the behavior of
households will be blue or shades of
blue and all diagrams relating to the
behavior of firms will be red or shades
of red.

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster

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CHAPTER 3 Demand, Supply, and Market Equilibrium

Input Markets and Output Markets: The Circular Flow

labor market The input/factor market in which
households supply work for wages to firms that
demand labor.

capital market The input/factor market in which
households supply their savings, for interest or for
claims to future profits, to firms that demand funds
to buy capital goods.

© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster

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CHAPTER 3 Demand, Supply, and Market Equilibrium

Input Markets and Output Markets: The Circular Flow

land market The input/factor...
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