© Sanjay K. Chugh
Static Consumption-Leisure Model
In our study of consumer theory thus far, we have simply assumed that an individual has
some given amount of labor income, which we denoted by
, to spend on consumption
Doing so allowed us to focus attention on the tools and principles of consumer
Economics is at its core a set of theories about decision-making, and casual
reflection reveals that individuals do have some control over how much labor income
That is, at least to some degree, individuals “choose” how much income they
earn just as they choose how much, say, good 1 and good 2 they consume.
section, we extend our model of consumer theory to incorporate this feature of individual
As we will see, the tools of analysis and general principles of this
extended model are ones with which we are already familiar – simply the tools of
indifference curves and budget constraints.
To simplify our introduction to this topic, we
will use a “one-shot” model in which the individual has no savings decision to make –
that is, there is no future, so that the only economic decisions to be concern the present.
Once we understand how the one-period consumption-leisure model works and we study
the consumption-savings model to come, we will
complete our analysis of macroeconomic consumer theory.
In addition to considering the structure of the consumption-leisure model, we will embed
within it from the beginning a consideration of government tax policy.
We will have
much more to say later about the role of macroeconomic tax policies, and it will turn out
that one of the major schools of tax policy thought to have emerged in the past 30 years
crucially hinges on the main features of the consumption-leisure model.
The Two “Goods”:
Consumption and Leisure
In our initial look at consumer theory, we supposed that there existed two broad
categories of consumption goods, “good 1” and “good 2.”
We will now condense these
two categories into just a single category called “consumption.”
That is, consumption is
any and all “stuff” that individuals might purchase in order to obtain utility (happiness).
Thus, consumption, which we will denote by
(without any subscripts), is an argument
to individuals’ utility functions.
Because we are interested in studying how consumers “choose” their income, we must
specify how consumers in fact earn their incomes.
One seemingly obvious way of
proceeding is to suppose that consumers obtain their income by working.
can choose to work some number of hours (per day or per week or per month, etc – we
will specify this more carefully below) for which he receives
dollars per hour is the individual’s gross wage rate, which in
what the individual actually gets to keep as the result of his efforts.
most countries, individuals are subject to a variety of government taxes – of the many