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Economics 2152A/B
Jennifer Mori

Building the labour marketchapter 4In this chapter we begin to build our macroeconomic model Remember the model consists of three markets the labour market the goods and services market and the moneymarket In order to begin modeling we must first define the elements of the modelFirstly we will need an economic agent in the model whose economic behavior we will model We will call this agent the REPRESENTATIVE CONSUMER The idea here is to give this agent the attributes that would generally apply to all consumers in the macroeconomy Now since millions of people can be in an economy and they are all different we must limit the common attributes to a very small number Therefore we will surmise that the representative derives utility from just two sources a consumption good and leisureYou can think of the consumption good as the only thing the agent needs or wants but that the more consumption goods the agent has the higher the level of utilityThe consumption good will also serve as the unit of account in this model economy By this we mean that every price is denominated in units of the consumption goodFor example if you work in this economy you would not get paid in dollars rather you would get paid in units of the consumption goodMaybe you would get 5 units of consumption per hour or 10 units etc When we do this we say that the consumption good is the numerarie of this economy This also means that the economy is a real economy meaning there is no money is this economyLeisure should also be thought of as a good in fact it will have a price as we will seeand the price of leisure will be denominated in consumption goodsMore on this in a moment Utility depends upon consumption and leisure therefore if we write this as a function we get U C l this is just the mathematical way of saying that utility U depends upon consumption C and leisure l When we write expressions like this we are using a GENERAL functional formAll we are saying is the U depends on whatever is inside the bracketsWe are NOT saying how consumption and leisure are combined to yield utility that 1212would be a specific form of the general function eg UClor UC2l etcOur consumer will also want to have some of both goods In other words it is reasonable to assume that in an economy people will want to consume and take leisure It would be unrealistic to model an economy where everyone was only interested in leisurenothing would be producedAs we said in the introduction the model has to be realisticBoth consumption and leisure will be considered NORMAL goods If you remember from eco 1021 a normal good means that as income increases the consumer would want more of the good Likewise as income decreases the consumer can not consume as much of the goodIn order to get a mental picture of all this we use a diagram that consists of indifference curvesThe most important point to remember about indifference curves is The level of utility is the same along an indifference curve but the combination of the goods providing that utility can be differentLook at the following diagramConsumption B A Leisure The level of utility is the same at point A as it is at point B but obviously if the consumer chooses point B he would have relatively more consumption than leisure
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