Competitive equilibrium
Introduction
Macroeconomic Outcomes:
MACROECONOMY
PRIVATE
SECTOR
Interact through policy:
1. Monetary policy (interest
rates)
2. Fiscal policy (taxes and
government spending)
FIRMS
CONSUMERS
Interact through three types of
markets:
1. Goods markets
2. Labor markets
3. Capital/asset markets
1.
2.
3.
4.
5.
GDP
Inflation
Unemployment
Trade balances
Etc. etc...
AGGREGATE
OUTCOMES
Microeconomics
foundation:
Utility maximization
PUBLIC
SECTOR
(GOVERNMENT)
Microeconomics
foundation:
Profit Maximization
2
Introduction
 We have a lot of consumers and a lot of firms. And each
consumer and each firm have to accept the prices given in
all markets:
 No allowance of so powerful consumer or saver that
can influence the prices of goods market and capital
market.
 Also, we do not allow for a firm so big that it can also
influence the prices of the three markets.
 In other words, each consumer and each firm will have to
take the prices as given in order to maximize their
benefits.
 Consumers take the price of goods, wage, and interest
rate as given to optimally choose how much labor to
provide, how much to consume and how much to
save.
 Firms will take the price of goods, wage and interest
rate as given to optimally choose how much labor to
employ, how much goods to produce and how much to
borrow to invest.
3