Individual Equilibrium

The chapter title 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 making 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. It means that we have to go through some microeconomics before aggregating the choices made at the microlevel to the entire economy.

So let’s start with some fundamentals: (1) Firms produce things because people demand them; (2) firms can produce things ...

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