How do households decide how much to spend, what to buy, and how much to work at any moment in time? Anyone who has taken Microeconomics 101 knows that economists have been studying these questions for centuries. Your typical economics textbook will carefully describe how decisions are determined by household preferences, the household budget, and the prices of goods and services (or the wages paid to labor). This analysis forms the basis for understanding many of the key questions in economics. How does demand change in response to a price increase? How does a change in income affect consumption? How does a change in wages affect how much people want to work? How does a tax on goods or income affect the economy? Do people save enough for retirement?

This article appeared in the Fourth Quarter 2019 edition of Economic Insights. Download and read the full issue.