Allocating Goods Over Time

Steven E. Landsburg

Chapter 17 in Price Theory and Applications, 2024, pp 643-684 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Markets enable people to trade one kind of good for another. In some markets, you can trade an apple for some oranges. In others, you can trade an apple today for some apples tomorrow. In everyday language, the consumer who trades apples for oranges is a “seller” of apples and the consumer who trades apples today for apples tomorrow is a “lender” of apples. But there is no essential difference between the two transactions. In each case, the consumer is faced with a market price (for the lender, the relevant price is the interest rate) and must decide how much to buy or sell at that price. Therefore, many of the tools of consumer theory — most specifically the machinery of indifference curves — can also explain borrowing and lending.In the first two sections of this chapter, we emphasize the simple observation that an interest rate is nothing but a measure of relative price. In Section 17.2, we see that this deceptively simple idea has some extraordinarily powerful applications.Having come to understand the meaning of interest rates, we turn to the question of how they are determined. Section 17.3 answers this question, using a simple supply and demand model. To simplify the discussion, we assume that there is no technology available for converting current goods into future goods.In Section 17.4, we relax that assumption. This enables us to study the market for capital and to increase our understanding of the determination of interest rates. However, one thing we discover is that, despite the artificial assumptions of Section 17.3, many of its conclusions remain true in a far more general context.

Keywords: Microeconomics; Price Theory; Supply and Demand; Demand Curve; Adverse Selection; Budget Line; Indifference Curve; Common Property; Competition; Competitive Industry; Constant-cost Industry; Consumer Surplus; Producer Surplus; Social Gain; Social Welfare; Efficiency Criterion; Economic Efficiency; Cost; Price; Deadweight Loss; Price Ceiling; Tariff; Rationing; Quotas; Equimarginal Principle; Price Discrimination; Monopoly; Two-part Pricing; Two-part Tariff; Fishery; Collusion; Income Effect; Substitution Effect; Normal Good; Inferior Good; Giffen Good; Externality; Property Right; Coase Theorem; Transactions Cost; Law of Demand; Marginal Cost; Marginal Revenue; Marginal Value; Market Failure; Moral Hazard; Nash Equilibrium; Normative Criterion; Positive Economics; Oligopoly; Hayek; Social Cost; Economics of Information; Sales Tax (search for similar items in EconPapers)
JEL-codes: D D04 D4 L11 (search for similar items in EconPapers)
Date: 2024
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