Lecture2_June7

Lecture2_June7 - June 7, 2010 The Three Macro Markets THE...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
June 7, 2010
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
June 7, 2010 Intermediate Macroeconomics 2 T HE T HREE M ACRO (A GGREGATE ) M ARKETS The Three Macro Markets Goods Markets Labor Markets Capital/Savings/Funds/Asset Markets Will put micro- foundations under all three… c P labor wage capital interest rate
Background image of page 2
June 7, 2010 Intermediate Macroeconomics 3 B ASICS Introduction Consumption-Leisure Model provides foundation for Labor-market supply function Goods-market demand function An application of the basic consumer theory model… …we will put a macro interpretation on it Only one time period – no “future” for which to save Notation c : consumption (“all stuff”) n : number of hours spent working per week l : number of hours leisure per week (time spent not working) P : dollar price of one unit of consumption (a nominal variable) W : hourly wage rate in terms of dollars (a nominal variable) t : tax rate on labor income “Weekly” model a detail Could have called it a daily model, a monthly model, a yearly model, … Just need to take SOME stand on the length of a “period” n + l = 168
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
June 7, 2010 Intermediate Macroeconomics 4 U TILITY Model Structure Preferences u ( c , l ) with all the “usual properties” Strictly increasing in Strictly increasing in Diminishing marginal utility in c Diminishing marginal utility in Plotted in good-by-good spaces: Plotted as indifference curves Utility side of consumption-leisure model no different than Chapter 1 model c u(c,l) leisure u(c,l) leisure c ( , ) 0 c u c l ( , ) 0 l u c l ( , ) 0 cc u c l ( , ) 0 ll u c l
Background image of page 4
June 7, 2010 Intermediate Macroeconomics 5 B UDGET C ONSTRAINT Model Structure Consumer must work for his income Y no longer “falls from the sky” Pc Y (1 ) Pc t Wn  Y = (1- t ) Wn (all income is after-tax labor income) ) (168 ) Pc t W l n = 168 - l ) 168(1 ) t Wl t W   Rearrange Spending on consumption “Spending” on leisure A constant from the point of view of the individual (price-taker) 1 1 2 2 Y  Spending on c 1 Spending on c 2 A constant from the point of view of the individual Simply an application/re- interpretation of our basic consumer theory model Chapter 1 budget constraint (After-tax) wage is opportunity cost of leisure, hence the “price” of leisure - opportunity costs are real economic costs / prices
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
June 7, 2010 Intermediate Macroeconomics 6 C ONSUMER O PTIMZATION Model Structure Consumer’s decision problem: maximize utility subject to budget constraint bring together both cost side and benefit side Choose c and l subject to or Plot budget line Superimpose indifference map At the optimal choice (1 ) 168(1 ) Pc t Wl t W   leisure c slope = -(1- t ) W / P 168 optimal choice ( c*,l* ) ( *, *) ) ( *, *) l c u c l tW u c l P CONSUMPTION-LEISURE OPTIMALITY CONDITION - A key building block of modern macro models MRS (between consumption and leisure) price ratio (inclusive of taxes) IMPORTANT: the larger is (1- ) / , the steeper is the budget line ) (168 ) t W l
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 38

Lecture2_June7 - June 7, 2010 The Three Macro Markets THE...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online