Production - Consumption Model

Objective: Overview of the operation of the economy.

The economy is always changing so as to equate consumption and production. If
consumption does not equal production, inventories adjust so as to restore equilibrium.
Consumption > Production Inventories . This occurs when consumers want
to consume more goods and services than are being produced.

Consumption < Production Inventories . This occurs when consumers do
not want to consume as many goods and services as are being produced.

Changes in inventories affect prices:
Inventories Goods are piling up in warehouses and on shelves. In order to
restore the equilibrium between consumption and production, prices must fall to
entice consumers to purchase more goods and producers to produce less goods.
Over time, consumption will again equal production and inventories will neither
accumulate or deplete.

Inventories Producers are not storing as many goods as desired. If
inventories are depleted, some people who desire goods will not be able to obtain
them. In order to restore the equilibrium between consumption and production,
prices must rise to entice consumers to purchase less goods and producers to
produce more goods. Over time, consumption will again equal production and
inventories will neither accumulate or deplete.
Anything that changes consumers desires to consume goods and producers desires to
produce will affect inventories. This course will examine the factors that influence
consumption and production.
Households
Business Firms Inventories
Production
Consumptio
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