 Module 105, in consumer behavior, we are going to study the consumption over time. Up till now, we have studied that the consumer is going to have various decisions related to its consumption behavior when he is having all type of the information related to the market prices or the commodity and he is having the preference. But what we have studied that was particularly related up to the one time frame. But this situation it tells that sometime consumer is facing a situation when he has to decide that how much he has to consume today and how much he has to consume tomorrow. But here this tomorrow might be just after one day or this can be after more time after one month but mostly if we divide the time, we can say that what will be the consumption of the consumer today or what will be the consumption of the consumer after one year. So, if the time it can be divided into some discrete units or these discrete units can be very small and can be very large. But here in this example, we mostly are going to take just one annual cap. So, if the consumer is going to decide between the two consumption pattern or the situation now how he will allocate the resources. Now, when we talk about allocation of resources, we know that the resources of the consumer are only its income. So, to attain this consumption, now its resources are in between of the commodities. Now, it has to go over that time for the consumption of the bundle of commodities. Means, there is a bundle of commodities that he is spending today. And similarly, if he is keeping some things in the future after a year, then he has to keep the share of his income there. Now, if we look at what he is spending today, we call it his current consumption and what he is keeping for the future, then we say that he is lending it or in other form we can also call it investing. So, if he has kept it in the future consumption or has landed it, then as a result, his current consumption will definitely be reduced. Because the assessment of his total consumption has to be done under the allocation of resources. So, if he is spending more today, then he will keep it less for the future and if he will take it more for the future for the lending, then for that today we will have less resources for consumption. So, now considering these two time situations, now we can assess it that during these two time frames, how he assesses his consumption while allocating resources. Now, if we look at it first, we will have to look at some assumptions. And in those assumptions, we have that when that one movement of consumption pattern is going on, it means that every period of time which he is dealing with, the consumer, the prices related to that should be given. And the consumer who is spending his consumption budget, he is optimally consuming it in both the conditions. Assumption 2 says that there are only two time periods, i.e. time 0 or time t, we can say, and time 1. Now, if we want it here, we can denote it from t0 and t1. And the individual who has spent his total consumption expenditure in these two time periods, and if we look here, so theory of full employment we are applying, they will say that he is not keeping his income anywhere separate. Whatever he is having, he is utilizing either for today, either for future, or either for on both of these two consumption. Third assumption, it particularly tells us that consumer faces a perfectly competitive capital market. And this perfect competitive capital market says that there is always a given price for borrowing and lending, which is usually expressed as an interest rate R. Now, if we look here, if he is not spending any income today, and he is keeping it for the future, then since the consumer is not consuming or the portion of income that he is not consuming today, wherever he has to invest or keep, on top of that, in the capital market, he is having a probability to get certain income. And similarly, if he is using it from somewhere else, then we will get the form of borrowing. So, the price of both of these will have to be paid. So, the price of premium which he is taking when he is lending it to someone, or if he is borrowing it to someone else, then that will be the R and it will be fixed in the competitive market. So, because there can be the various other situations, we will have to take the competitive of the capital market. Now, looking at this situation, if we say that the consumer has to optimize, then for that optimization, there should be certain elements. Now, those certain elements, they say that there will always be a choice variable which will be two situations, one will be M0 and one will be M1. Now, this M0, that will be particularly respective to time T0 or M, that will be respective to time T1. And second element says that the consumer preference ordering over the combinations of current and future consumption expenditure will be M0 or M1 and that must be satisfying all the assumptions which we have been making in our consumption patterns. Means, consumer should be rational and along with being rational, all of our income will be only utilized on those two commodities. And in this situation, the consumer cannot go on the corner solution. That cannot be that he is spending all today or in the future because if we are on the corner solution, then in this situation, we will not be able to explain its consumption under this time frame. And there is always a feasible set. Now, this feasible set has a constraint. So, if we talk about the constraint, then the consumer is endowed with an income. Now, that income is available in the form of a time stream. It means there is one income which is available today, that is M0 and that income which will be available in the form of time 1, that will be M1. And the problem that we are seeing in front of us is that at least one of these should be positive and mostly because if we look at our income, then we have to deal with this equation. And now, coming to the next. There is one graph which explains that there is the total wealth of a consumer. Now, the wealth in this form is because he is having all the resources along with him and he has to take those resources in two time frames in which he has to utilize all his income today along with X axis. And if he is using it in some future time, then that will be M1 in which he has M1 in that time stream. And keeping in view this, if we look at these two time frames, the change of income means change of M1 by change of M0, then the rate between our lending and borrowing is 1 plus R. Now, if R is here, that is the rate of interest. And this depends if we check that time 1 means M1 which will have income, that will be equal to M0 into 1 plus R. And if we say this we can say this is M0 into M0 plus M0 multiplied by R. In this form, we can explain this. So, this gives us the slope and the slope of this wealth line we have dM1 by M0 and that is equal to 1 plus R. Now, this wealth line tells us the opportunities of market exchange. If the consumer understands that in the future, after investing, he will be well off and he is getting good interest rate, then he will keep most of the interest rate for M1 and will take less today. And if this will be the situation, then if we look at this, then this situation will be landing. So, we can say that by landing, consumer can move towards leftward and in the form of leftward, if we look at this, we have this budget line or graph. And because of that, if we look at it, then it becomes flatter because its slope is in this form. And likewise, if we look at it, if it borrows, then it moves to the leftward, then its slope will go towards leftward. Now, if we look at this situation, that each point on V0 represents simultaneously a consumption time stream and amount of borrowing or landing in year T0 we have and a cross-purning repayment we have to get in year 1. So, if we check in this form, then if we look at the consumer from one point to another in the movement, then this is V0 and this is V0 with V prime and if we look at V double prime, then this is just the shift of that income. So, if we look at two points, then the M point changes the price of the landing when its interest rate changes because of that. But if we change its total wealth, then just as we talk about income, then there is a possibility that both its intercepts will change. And in the same way, we can see that in this situation, now the consumer can decide the various aspects. If we look here, then change in M0 will be seen from here. And if we talk about change in M1, where we can see the vertical form. So, in the form of landing, we can see that the consumer if we look at the rate of landing, then that movement will be on the x axis. And in the same way, if M1 means the interest rate is high, then the movement on the vertical axis will be upward. Now, in the same way, if we look at the single class, then the optimum point is the slope of the indifference curve. So, the slope of the wealth line we will see. Now, if we look here, the indifference curve of the consumer is moving between the two time frames. And the optimal point is the point M in front of us. So, this is the slope of that indifference curve when the consumer is indifferent between the two time frames. And the ratio of marginal utilities of this that is equal to U0 by U1. And where Ui is the marginal utility of period I consumption with reference to the other. So, if we look at this, then these are the two time frames of the utilities between the two. In the same way, if we look at the 1 dollar reduction in M0 in the mean income, then this reduces the utility and there will be an increase in M1 which will make the consumer just wealth of as before that the income of M0 is reduced. So, this will be the situation that if we look here, the income is reduced and the left side is moved. So, on this form, the movement is in this situation. So, this compensating increase that we are going to see on Y axis it is defined by the shift in the utility and where the notation it emphasize that the marginal utilities are U0 and U1. Now, looking at this formula or equation that our investment is consuming through this theory we can explain. And if we look here, it is very clear that the incomes are actually they are related to that particularly slope which is on interest. So, the interest rate of the capital market is the basic point that decides the decisions of the consumer. If the banks offering interest rate is high today, then the consumer will be having more for the future and if the interest rate is reduced then the consumers are less willing to have their more part of the income in the banks or investment rather they want to increase in the consumption. So, this theory of the elementary choice over the time this explains the decisions of our investment very much.