Demand, Supply, and Market Equilibrium
The Basic Decision-Making Units
A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.
An entrepreneur is 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 are the consuming units in an economy.
The Circular Flow of Economic Activity shows the connections between firms and households in input and output markets.
Input Markets and Output Markets
Output, or product, markets are the markets in which goods and services are exchanged.
Input markets are the markets in which resources—labor, capital, and land—used to produce products, are exchanged.
Payments flow in the opposite direction as the physical flow of resources, goods, and services (counterclockwise).
Input Markets
Input markets include:
The labor market, in which households supply work for wages to firms that demand labor.
The capital market, in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.
The land market, in which households supply land or other real property in exchange for rent.
Determinants of Household Demand
A household’s decision about the quantity of a particular output to demand depends on:
The price of the product in question.
The income available to the household.
The household’s amount of accumulated wealth.
The prices of related products available to the household.
The household’s tastes and preferences.
The household’s expectations about future income, wealth, and prices.
Quantity Demanded is the amount (number of units) of a product that a household would buy in a given time period if it could buy all it wanted at the current market price.
Demand in Output Markets A demand schedule is a table showing how much of a given product a household would be willing to buy at different prices.
Demand curves are usually derived from demand schedules.
The Demand Curve The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.