Ethics Reflection
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That in a full employment competitive equilibrium the aggravate supply and aggravate demand are equated. Also that all three markets such as: Labor, Capital and Product must all be in equilibrium for the overall economy is to experience equilibrium because all market are interlinked and changes in one market affects the others . The breakdowns of the three markets are as follows. In the Labor market the real wage equal the demand for labor with the supply for labor, the increase in the labor supply at each real wage are reflected in the lower real wages, which will induce the firms to create additional jobs to match the increases in the labor supply.
The Capital market is studied by the real interest rate with inflation which should be equal to investment and savings. The level of investment decreases with increases in the real interest rate. Households savings depends on the disposable incomes and the real interest rates. When the economy is in full employment the interest rate is the main concern in determining savings. When saving and investment are equal, the demand for goods and services will equal the level of output . The capital market balances leakages and injections in the circular flow of income.
The product market the resources needed by firms consist of physical assets (building, machinery and equipment) These firms then decides to invest or increase it. When total spending equal total output that signifies that there is a equilibrium in the product market. There are many scenarios that can occur in this market for instance say that total spending is less than total output that means households are not spending all their disposable income on services and goods, which mean they are probably saving which is termed as leakage. These savings are barrowed by firms to invest in hiring of labour or investment which is basically a injection back into all the markets.