capsupply.10

Capsupply.10 - Econ 100A Capital Supply(Chapter 10 Thomas G Koch Fall 2008 Thomas G Koch Capital Supply(10 1(39 Clickers • Turn on your clicker

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Unformatted text preview: Econ 100A: Capital Supply (Chapter 10) Thomas G. Koch Fall 2008 Thomas G. Koch Capital Supply (10) 1(39) Clickers • Turn on your clicker • Hit a button Thomas G. Koch Capital Supply (10) 2(39) Inter-temporal Choices • “Inter”—between • “temporal”—of or related to time • “choices”—what do we do? Thomas G. Koch Capital Supply (10) 3(39) You get a paycheck • Could spend it all today • Could save it all for tomorrow • Earn interest Thomas G. Koch Capital Supply (10) 4(39) You get two paychecks • You get today’s paycheck, m 1 • Tomorrow, you earn m 2 • Can consume today, c 1 • And consume tomorrow, c 2 Thomas G. Koch Capital Supply (10) 5(39) What are the prices? • Think of opportunity costs • If I consume more today . . . • I can consume less tomorrow • And I lose interest, r , on the savings Interest rates matter Thomas G. Koch Capital Supply (10) 6(39) Think of the boundaries • If I consumed nothing today, everything tomorrow • I would save today’s earnings . . . • and earn interest on it! Future value of income (1 + r ) m 1 + m 2 Thomas G. Koch Capital Supply (10) 7(39) If we consume everything today • We get today’s income • Plus tomorrow’s income, but . . . • We have to pay interest to borrow it • Only get m 2 1+ r < m 2 from bank. Present value of income m 1 + m 2 1 + r Thomas G. Koch Capital Supply (10) 8(39) Present vs. Future • Can express consumption in present terms • Consume today, at price = 1 • Consume tomorrow, at price 1 1+ r • Price < 1 , because of interest Present Value Budget Constraint c 1 + c 2 1 + r = m 1 + m 2 1 + r Thomas G. Koch Capital Supply (10) 9(39) Or future value...
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This note was uploaded on 09/12/2011 for the course ECON 100A/ 100B taught by Professor Staff during the Fall '08 term at UCSB.

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Capsupply.10 - Econ 100A Capital Supply(Chapter 10 Thomas G Koch Fall 2008 Thomas G Koch Capital Supply(10 1(39 Clickers • Turn on your clicker

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