Fisher’s Theory of Consumption in Two-Period Model | INTERTEMPORAL CHOICE | becc 109

Fisher’s Theory of Consumption in Two-Period Model
5.3.1 Intertemporal Budget Constraint
5.3.2 Consumers’ Preference
Consumer’s Optimisation Problem
5.4.1 Effect of Change in Income on Optimum Consumption
5.4.2 Effect of Change in Interest Rate on Optimum Consumption
5.4.3 Constraints on Borrowing

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The model considers two distinct time periods: Period 1 (current period) and Period 2 (future period).
Consumers are assumed to decide how much to consume in each period based on their income, preferences, and interest rates.
Consumption Function
The consumption function represents the relationship between current income and consumption. According to Fisher, individuals derive utility from both current and future consumption.
The total utility is maximized by choosing an optimal combination of consumption in both periods.
The model incorporates interest rates that affect the intertemporal choice of consumption. The interest rate determines how much future consumption is worth in present terms.
If consumers save money, they earn interest, which adds to their future consumption potential.
The Budget Constraint
The budget constraint in Fisher’s model defines the trade-off between current and future consumption. The equation can be expressed as:
This equation shows that the total value of consumption in both periods (considering the interest rate) cannot exceed the total resources available in both periods.
Preferences and Utility Maximization
Utility Function:

Fisher's Theory of Consumption
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