INTRODUCTION

Often decisions made by consumers, firms etc take into account consequences not only for the current period, but also for the future periods. This is because future payoffs are often determined by current decision-making. Some goods are durable; they can last and contribute to a consumer's satisfaction for years. Examples are a refrigerator and an air conditioner. Likewise, capital expenditures by a firm involve purchases of equipment that is likely to last for several years. In such cases decisions may involve comparison of an outflow today with inflows in the future. Thus, “time” becomes an important ingredient of analysis in such a situation. It is, therefore, necessary to understand the structure of markets that links current decision-making with future payoffs. It becomes essential to note that lending and borrowing will be an important aspect of a decision-maker's behavior. Consumer's preference ranking over consumption bundles are now defined on the amounts of goods to be consumed in the current period and the amounts to be consumed in the future periods. This is discussed in Section 2.2 of this chapter.