CHAPTER 3

Individual Equilibrium

The title of this chapter might seem puzzling to the reader. In Chapter 1, we distinguished macroeconomics from microeconomics by defining the former as applying to aggregate economic activity and the latter to individual economic activity.

Yet, macroeconomic activity boils down to decisions to supply labor and financial capital (which is what people provide when they save) to firms that use their labor and financial capital to produce the goods that workers buy. This means that we have go through some microeconomics before aggregating the choices made at the microlevel to the entire economy.

So let’s start with some fundamentals: Firms produce things because individuals are willing to supply them with labor and ...

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