Ech 22306 - Powerpoint Presenaties - Economic of Households

Powerpoint presenaties ECH 22306

Week 1; consumption and time

Outline

• The lecture Consumption and time is theoretical of nature. We start with a simple neoclassical model of goods.
• Then. the basic structure of the New Home Economics(NHE), which is neo-classical economic theory of the firm applied to the household, is explained. It leads to the incorporation of time in models that have several implications
• The differences between income and time elasticity are stated.
• The Linder argument will be explained with implications for goods and time intensive activities

Neo-classical economics

• Utility function: u = U(x1, …, xN)
• Budget restriction: Σi pixi = y
• u = utility
• U(.) = utility function
• x = market good
• p = price of market good
• y = income
• Result: increased utility due to more consumption of goods

Time in the NHE

• u = U(x1, …, xN-1, tl)
• Restrictions: Σi pixi = tww+y0;  tl + tw = T 
• tl = leisure time
• tw = labor time
• T = total time
• w = wage rate
• y0 = unearned income, x, p as before
• Result: increased utility due to consumption of more goods and/or leisure (empirical question)

Basic observation of household economics: Household technology determines utility

• u = U(z, zl); z = f(th, x); zl = g(tl, x)
• Restrictions: Σi pixi = tww+y0;  tl + th + tw = T 
• z = home products; zl = leisure products
• f(.) = household production function
• g(.) = leisure production function
• th = household production time
• tl ,tw ,T, w, y0,x , p as before

Utility increases due to consumption of more goods and/or leisure, and efficiency of time use.

New Home Economics

• New Home Economics (NHE); Garry Becker, professor of economics and sociology in Chicago, powerful theory
• Household is a small firm, acts perfectly rational, task specialization according to comparative advantage
• Paid work (Hw), household work (Hh), leisure (Hl)
• Pw = wage rate = price of one hour of paid work = price of one hour of household work = price of one hour of leisure = opportunity cost = foregone earnings

• Production substitution effect (pse) and consumption substitution effect (cse) of a change in Pw
• Pse: work/leisure trade-off
• Cse: income/leisure trade-off
• In pse, total hours of work remain constant. So as Pw↑ → Hw ↑ and Hh↓
• In cse, total satisfaction remains constant, so as Pw↑ → Hw ↑ and Hl↓
• Ie = income effect
• Te = pse + cse + ie; pse and cse < 0 and ie > 0, so te is empirically established

Income elasticity of a good:

• Percentage change in expenditures on the good per percentage change in income

• Inferior good:         e<0           (e.g., potatoes)
• Luxury good:         e>1           (e.g., durable goods)
• Necessary good:         0

• Income elasticity of total consumption = 1 (with constant savings ratio)

Income elasticity of time used in an activity (a)

• Inferior activity:        a<0 (e.g., reading)
• Normal activity:        a>0 (e.g., photography)
• Income elasticity of total activity = 0 (because available time is constant)
• One may possibly buy more of everything but one cannot do more of everything:
• Average e > average a

Linder: The Harried Leisure Class

• Linder argues that leisure time has increased till 1970s/1980s in the USA
• Since goods have become cheaper than leisure time, leisure has become more goods-intensive.
• Leisure time has increased substantially over time.
• However, amount of money available per hour has increased even more: goods have become cheaper in relation to leisure time.
• This has led to a change from time-intensive to goods-intensive use of leisure time.
• Hence, time spent per item has reduced on average.
• In general, leisure time has become less relaxed more harried
• Since the efficiency of some activities can be increased by using more goods, one obtains more utility from such activities. Such activities become popular with increasing income.
• Remind that less time is spent on each item. (Acceleration of consumption.)

Three ways to increase productivity of time use within the Linder framework

• Buying more expensive models of a good;
• Simultaneous consumption;
• Successive consumption.
• Equilibrium: equal marginal utility of spending time on each activity.

Conclusion & discussion

• Availability of time and increasing income has induced goods-intensive consumption of leisure time;
• This has several implications for time use during the family life-cycle (where income and time varies across periods).

Week 1: time use

Outline

Contents

• This lecture starts with a brief overview of the contribution of some economists to the debate of modernization.
• Modernization of a society is not only reflected in consumption but also in changes in time use or the allocation of time. Several issues and trends with respect to the use of time by persons/households in a society labelled postmodern as the Netherlands are discussed. Especially the allocation of time between paid work and household work and time management are discussed.
• After a socio-economic exploration of factors affecting time used for household production, attention will be paid to the contribution of the New Home Economics in this respect. This model provides several useful insights regarding factors that have influenced the decline in women’s household work during the 20th century and the changes in the overall economic value of household work.
• Differences and trends in time use across socio-economic strata are discussed
• Factors as decline in family size, increased labour force participation of married women, monetarisation of household production, better education of women and the rise in the opportunity costs of women’s time are discussed, as well as topics like parental time spent with children and the shared and solitary character of household work time

Modernization and time allocation

• Some topical modern and post modern key-words (buzz words): technological change, demand management, rise of the transnational corporation, planning and control, managerial class (bureaucrats) vs. entrepreneurs, welfare state, the fate of the middle class, deindustrialization, McJob, Mcdonaldization of society, women’s emancipation, ICT, genomics, experience economy, sustainability, globalization, Empire, fast food nation, quality, food safety, transparency, and the like
• Democratization in political, economic, social and cultural field at least in the developed part of the World
• First and second demographic transition
• Increase in life expectancy/good health and increase in level of education → rise in human capital, most important capital in society

Time allocation