• Unit 3: Consumption, Savings, Capital, and Investment

    Households are generally defined as the owners of all factors of production in an economy. Since households provide the factor services of labor, land, capital, and ownership to businesses, they receive payment in the form of wages, rent, interest, and profits. When we talk about "household behavior" in this unit, we mean the decisions that households make in various contexts, such as decisions concerning consumption, savings, investments in education and training.

    "Firm behavior" is primarily concerned with boosting efficiency and productivity in the production of goods and services. The firm's decision-making processes center upon technology, entrepreneurship, innovation, employment relations, outsourcing, and competition policy. The interplay of decisions between households and firms is critical to maintaining a flow of goods, services, and incomes in a complex economy. This unit focuses on the decisions made by households and firms, the factors the influence those decisions (such as the trade balance, and interest rates faced by firms), and their effects on the macroeconomy.

    Most of us are familiar with the interest paid on deposits or the interest paid on a mortgage. This unit will discuss this concept in macroeconomic terms. It will explain that individuals and firms need money in the present in order to operate, so when money is borrowed for use, a payment is made for its use over a period of time. We call these payments interest rates. As with the price of anything, if demand increases for the use of money, then its price (the interest rate) also rises.

    Completing this unit should take you approximately 20 hours.

    • Upon successful completion of this unit, you will be able to:

      • apply basic tools that are used in many fields of economics, including uncertainty, capital and investment, and economic growth;
      • compare and contrast arguments concerning business, consumers and government, and make good conjectures regarding the possible solutions; and
      • analyze the methods of computing and explaining how much is produced in an economy.

    • 3.1: Consumption and Saving

      • Consumption and Saving URL

        Read Chapter 5 on pages 99–127. Consider the relationship between consumer demand and the level of savings. Analyze the effect on the international position of the economy and the market level of interest rates.

    • 3.2: Capital and Investment

      • Capital and Investment URL

        Read Chapter 7 on pages 155–163. Think about how interest rates are set relative to an open economy. Does the market always allocate the correct level of capital and investment?

      • Macroeconomics Lecture 7 URL
        Listen to this lecture.

    • 3.3: IS-LM Analysis

      • The IS Curve URL

        Read Chapter 7 on pages 163–169. Think about the effects of government decisions on interest rates and levels of investment.

    • Unit 3 Assessment

      • Unit 3 Assessment Quiz
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        Take this assessment to see how well you understood this unit.

        • This assessment does not count towards your grade. It is just for practice!
        • You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
        • You can take this assessment as many times as you want, whenever you want.