Time preference

From Academic Kids

Time preference is the economist's assumption that a consumer will place a premium on enjoyment nearer in time over more remote enjoyment. A high time preference means a person wants to spend their money now and not save it, whereas a low time preference means a person might want to save their money as well.

A high time preference indicates that a person puts a high premium on satisfying wants in the near future.

The time preference theory of interest is an attempt to explain interest through the demand for accelerated satisfaction.

This is particularly important in microeconomics. The Austrian School sees time as the root of uncertainty within economics.

In Capital and Interest, the Austrian economist Eugen von Boehm-Bawerk built upon the time-preference ideas of Carl Menger, insisting that there is always a difference in value between present goods and future goods of equal quality, quantity, and form. Furthermore, the value of future goods diminishes as the length of time necessary for their completion increases.

Boehm-Bawerk cited three reasons for this difference in value. First of all, in a growing economy, the supply of goods will always be larger in the future than it is in the present. Secondly, people have a tendency to underestimate their future needs due to carelessness and shortsightedness. Finally entrepreneurs would rather initiate production with goods presently available, instead of waiting for future goods and delaying production.

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