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Chapter 9 - Chapter 9 Demand for Goods and Supply of Labor...

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Chapter 9 Demand for Goods and Supply of Labor and Capital If you have ever taken an economics class before, you probably dived right into drawing demand and supply curves. 1 You may be puzzled by the lack of any attention we have given to these concepts thus far. The reason for this is not that demand and supply curves are unimportant. Rather, demand and supply arise from individual decision making — from economic agents choosing to do the best they can given their circumstances. It is difficult to fully appreciate the concepts of demand and supply — to know what they tell us and what they do not tell us — without first understanding how demand and supply arise from such individual optimizing behavior. Having taken a close look at how economists think about individuals doing the best they can given their circumstances, we are now ready to see how such individual decision making leads to some types of demand and supply curves. In particular, we have analyzed how individuals make choices in three different roles within the economy: as consumers choosing between various goods, as workers choosing between consumption and leisure, and as savers/borrowers choosing how to plan for the future. In their role as consumers, individuals become demanders of goods and services , while in their role as workers they become suppliers of labor . Finally, as savers they become suppliers of financial capital , while as borrowers they become demanders of financial capital . We will therefore be able to derive from what we have modeled so far demand curves for goods and supply curves for labor. Depending on whether an individual borrows or saves, we will also be able to derive demand and supply curves for financial capital. In later chapters, we will complete the picture of goods and services markets, labor markets and capital markets by adding the role played by producers — who supply goods and demand labor and capital. 1 Chapter 2 and Chapters 4 through 7 are required for this chapter. Chapter 3 and 8 are required for sections 9A.2, 9A.3 as well as 9B.2 and 9B.3. Those sections can be skipped by students who are not reading Chapters 3 and 8.
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252 Chapter 9. Demand for Goods and Supply of Labor and Capital 9A Deriving Demand and Supply Curves We begin, as always, with a non-mathematical treatment of demand and supply curves that arise from individual optimizing behavior. Here we will use the graphs we have developed thus far to illustrate how the demand and supply curves you have probably seen in other classes arise from such models. Section 9A.1 will begin with demand relationships for goods and services, while later sections extend the analysis to similar relationships in labor and capital markets. 9A.1 Demand for Goods and Services In the previous chapters, we have already analyzed how the quantity of a good that is demanded may change with changes in underlying economic circumstances — whether these are changes in income, wealth or prices. Our answer has always depended on the underlying tastes that gave rise
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