The Economy 2.0 - Microeconomics

Take a closer look at the units of the microeconomics volume of The Economy 2.0: what they’re about, what models they present, how they’re changing compared with The Economy 1.0.

 

Unit 9 — Lenders and borrowers and differences in wealth

Summary

Unit 9 starts with an expanded section to explain income and wealth, as well as financial assets such as shares and bonds. The unit demonstrates that a person can rearrange the timing of their spending by borrowing, lending, investing, storing, and saving; and that those with more wealth typically have more and better opportunities to do this than poorer people.

 

Models

The key model of this unit is the intertemporal choice model, with preferences represented with indifference curves and the slope of the budget constraint depending on the interest rate. The unit also includes a detailed discussion of the principal-agent relationship between lenders and borrowers to explain why some borrowers – even those with a sound investment project – do not have access to credit.

 

Major changes

The previous Unit 10 has been split up, with the intertemporal choice model the focus of Unit 9 in The Economy 2.0: Microeconomics, and the material on balance sheets and banks now in the macroeconomics volume. This change makes room for a greater emphasis on inequality for example, new sections on poverty traps for borrowers and policies to reduce risk exposure for those with low wealth. There is an application to the environment about how to discount the future, with questions and exercises using CORE Econ’s discounting simulator. The use of the Lorenz curve has been moved to the macroeconomics volume, which means that Unit 9 focuses on the calculation of the Gini coefficient from the wealth (or income) differences among people rather than from the Lorenz curve diagram. The new Unit 9 also clarifies that the term “impatience” is a technical term and not a moral judgment and includes a more detailed explanation of situational impatience versus intrinsic impatience, and how these are reflected in indifference curves.

 

The header

This is the header we’ve chosen for Unit 9.

It shows aggressive advertising for loans. Loans are a way to move consumption in time, which is discussed in Unit 9 as part of intertemporal optimisation.


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