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Chapter 17 Consumption (Fisher's Theory of Intertemporal Choice…

- - - - Amount consumed rather than saved for each additional dollar of income
      - C = MPC( Y - T )
    - - Ratio of consumption to income (how consumption changes as income changes)
      - APC = C/Y = C(bar)/Y + c
    - - C = C(bar) + cY
      - C = consumption
        C(bar) = autonomous consumption (necessary consumption that does not depend on income)
        c = MPC, slope of consumption function
        Y = income
- - - - Assume no saving in period 2
      - Borrowing: If C1 > Y1, C2 < Y2
      - Saving: If C1 < Y1, then C2 > Y2
  - - - Shows all combinations of C1 and C2 that make the consumer equally happy
      - If first C1 is reduced, C2 must increase to keep consumer at same level of happiness
      - Higher difference curves mean higher levels of happiness
    - - The amount of C2 a customer is willing to substitute for C1
  - - - MRS = 1 + r
      - Slope of IC = Slope of MRS.
  - - - Income effect: Savers can consume more in second period (higher C2). Borrowers will consume less in second period (lower C2). If spending is on normal goods, consumption will go up both periods. Normal good: Want more when income rises
      - Substitution effect: If r goes up, consumers tend to decrease C1 and increase C2, due to higher opportunity costs for savers, and heavier repayment for borrowers.
- - - - C = aW + bY
        a = 1/T = marginal propensity to consume out of wealth
        b = R/T = marginal propensity to consume out of income
      - C = (W + RY) / T
        (W + RY) = lifetime resources
        W = initial wealth
        Y = annual income
        R = years until retirement
        T = remaining years of life
    - - APC = C/Y = a(W/Y) + b
      - Sort run, wealth does not grow proportionally with income (wealth "constant"), so high income households have lower APC than low income households
      - Long run, wealth and income grow together, causing APC to be stable
- - - - APC = C/Y = (aYp) / Y
      - If higher income households have higher transitory income (e.g. from stock market), APC will be lower
      - Over long run, income variation mainly due to permanent income increases or decrease, which implies stable APC
      - APC rises as permanent income takes up larger fraction of total current income.