Consumption and Saving

INTRODUCTION In Chapters 2 and 3 a simple one-period model was developed and used to analyze household demands for goods and services at any point in time. In such a model the household has no memory and no foresight; it lives only in the present. Although terribly simple, the model is very helpful in understanding how families allocate their current income among the competing current demands for those resources. But households are not so myopic as to confine their decision making to the present. They recognize that today is not a capsule with no yesterday and tomorrow. Rather, today's decisions must be made in recognition of what occurred before and what is expected to occur in the future. Commitments made in previous periods are honored in the present. Furthermore, not only do they expect to demand goods and services tomorrow, but households also expect to have added resources in the future. Consequently, one can expect that households will behave today in the light of their yesterdays and what they expect for their tomorrows. That the consumption behavior of families has a past is reflected in the fact that families have debts from the past that they must pay off at least in part in the present and that they have resources from the past (financial assets like bank accounts, stocks and bonds, and physical assets, such as owned homes, cars, durables, and the like) that can be used to augment present consumption.