3. A model economy INTRODUCTION In addition to understanding the necessity of modeling and what constitutes a good model, we now understand why the axiom of maximizing behavior can yield ﬁrmly grounded insights to human sociality. We conclude Part I by employing this axiomatic approach to build a very simple model economy. Building this model will not only strengthen our ability to think like a social scientist, it will also let us precisely deﬁne the fundamental issues in ‘money and banking’ – that is, how societies economize on transacting in spot and future markets, and how this organization relates to economic performance. MAXIMIZING-HOUSEHOLDS AND THE DEMAND CURVE Equipped with the axiom of maximizing-behavior, we can now build (from the ground up!) a model economy. We’ll start by considering how households’ egoistic behavior yields the familiar principles-level insight that demand curves slope downward. Suppose that households enter our model economy with preferences represented by the indiﬀerence curves shown in Figure 3.1.1 Also assume that, subject to a budget constraint, our households choose consumption bundles ‘as if’ they maximize utility. Characterized as such, our household’s problem is formally identical to that of our moose in Chapter 2 – that is, maximizing-households choose bundles like (x1, x2) from feasible opportunity sets. Why does our axiom yield this implication? In short, any other choice would forgo superior, and feasible, levels of utility. If our household consumed less of good 1 than is represented by x1, for example, then it would not be maximizing. Indeed,...
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