Materials¶
Notebooks¶
The following computational notebooks are companions to the reading assigned in Lecture 02:
Two-Period Consumption and Labor Supply: Companion to The Period Life Cycle Model and Consumption and Labor Supply
The Diamond OLG Model: Companion to The Overlapping Generations Model
Learning Objectives¶
By the end of this lecture, students will be able to:
Set up and solve the two-period consumption problem
Derive and interpret the Euler equation
Explain Fisherian separation and its implications
Describe the Diamond OLG model with population growth
Distinguish between competitive equilibrium, social optimum, and Golden Rule steady states
Define dynamic efficiency and explain why the first welfare theorem can fail in OLG economies
Key Concepts¶
Intertemporal budget constraint: The present value of lifetime consumption equals total wealth
Euler equation: The optimality condition equating marginal utility costs and benefits of saving
Intertemporal elasticity of substitution (IES): How consumption growth responds to interest rate changes
Fisherian separation: Consumption depends on total wealth, not on the timing of income
Dynamic efficiency: Whether reducing capital can raise consumption for all generations