Notes 10-18

# Notes 10-18 - In Microeconomics we look at consumption...

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The Economy in the Short Run Consumption (Chapter 17): Important because it is the biggest component of GDP Tells us a lot about other factors History of Consumption Thought: We are all consumers, what we don’t save we consume Factors influencing consumption Income, Savings, Wealth/Assets, Timing, Interest Rate (real), Social Pressure Keynes’ Consumption Function: He says What matters in practice is current income. Average Consumption/ Income = Average propensity to consume. This is ever declining as it advances Keynes also believed that the marginal propensity to consume, is constant. So, a change in income always gives you the same rise in consumption. Cbar + cY. MPC= c(Y+1) – C(y) = c(Y+1)- c(Y)= c APC= cbar/Y +c is declining in y Cross section evidence at a point in time. Does it fit time series evidence? What is c*/Y*=Cbar/Y* +c. Keynes theory contradicts the data!!! Intertemporal choice (Fisher) Basic idea (adapt the tools of micoreconomics with regard to consumption choice)

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Unformatted text preview: In Microeconomics we look at consumption choice, subject to a budget constraint. Consider consumption at different dates to be different goods. P1yi+p2y2+….pnyn=I EX: Let’s look at a consumer who lives, earns, and consumes for 2 periods. Can save and borrow at interest rate r. In period 1 s= y1 - c1 +s=savings -s=borrowing In period 2 c2= y2 + s(1+r) c2=y2 + (y1-c1) (1+r) C1(1+r) + c2 = y2(1+r) +y2 Divide both sides by 1+r C1 + c2/1+r = y1 + y2/1+r This is the intertemporal budget constraint Earlier consumption has a higher importance than later consumption because it loses the ability to gain interest When you save, you trade todays consumption for tomorrows consumption POV Is the maximum amount of expenditure that can be formed from a sequence of payments. Ex: Is \$700 today better than \$1000 in 5 years. 1000 = c(1+r) = c= 1000/(1+r)5...
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## This note was uploaded on 04/18/2011 for the course ECON 302 taught by Professor Staff during the Fall '08 term at UVA.

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Notes 10-18 - In Microeconomics we look at consumption...

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