Intertemporal choice in economics refers to decisions made today that impact future options. It applies to both personal and business decisions, such as when to consume and what to do with resources. The goal is to accurately predict outcomes and maximize benefits.
Intertemporal choice is a term used in economics to describe the impact of decisions made today on the type of options available in the future. This type of choice is found not only in the management of an individual’s financial resources, but also in the decisions made by companies in terms of purchases and consumption. The idea is to accurately predict the outcome of intertemporal choice and decide whether that effect on the future is good or bad.
One of the basic concepts of intertemporal choice has to do with consumption. Essentially, the idea is that if consumption doesn’t happen today, there’s a good chance it will happen tomorrow. Assuming that the prices of goods consumed will be lower tomorrow, it may be in the consumer’s best interest to give up on purchases today and buy goods and services tomorrow when prices have fallen. As with most business decisions, this poses a certain risk as prices may simply remain at the same level or even rise if unforeseen factors occur affecting the demand for those products.
In addition to worrying about when consumption occurs, intertemporal choice is also about what is done with the resources that would have been used in the consumption process. For example, an individual may decide that instead of buying a home today, he will invest money in an interest-bearing type of account. Ten years later, the funds are withdrawn to buy a house with a significantly lower rate. Meanwhile, the result of that consumer decision is that the deposited funds have earned interest which has allowed them to pay more than the purchase price, resulting in a reduction in funding. In this scenario, consumption is not only delayed by a certain time, but resources that would have been used beforehand are increased, making it possible to obtain greater benefits or utility once the purchase is made.
The idea behind intertemporal choice is to get the maximum benefit from consumption. By determining whether personal consumption expenditures will provide higher returns today than tomorrow, the timing can best be calculated. Failure to consider all pertinent information may result in an inaccurate prediction of the outcome and ultimately cause the consumer to derive less satisfaction from the transaction. For this reason, it is important to consider as many outcomes as possible before making a final decision.
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