Lesson 1A: Consumer Choice

Budget Line/ Budget Constraint

• Economic Model for an individual’s economizing problem

• A schedule or curve that shows the various combinations of 2 products a consumer can purchase with a specific money income

• Assumes 2 goods, but analysis generalizes to all goods available to consumers

• Location depends on a consumer’s income and price of 2 products under analysis

Principle of Scarcity

The combination of limited income and unlimited wants force us to choose those goods & services that will maximize our utility

Economic problem

Scarcity (not enough “stuff” for everyone to get what they want)

Biggest constraints for everyone to have what they want are..

time and money

Utility

open-ended term that means happiness, satisfaction, how useful something is to us

Slope of budget line ( negative straight line)

(price of good on horizontal axis)/ (price of good on vertical axis)

What will change the slope of the budget line and purchasing power of consumer?

A change in the price of one of the goods

Points on or inside budget line

attainable points given relevant income and prices

Points outside (up and to the right) budget line

unattainable points

Negative slope of budget line

Represents that consumers must make trade-offs in their consumption decisions

Value of budget line slope

measures precisely the opportunity costs of one more unit of a good under analysis

What forces people to choose?

Limited income and positive prices

Budget line does NOT…

indicate what a consumer will choose (only what they can choose)

What will shift the budget line?

Income changes (greater income= line shifts out and to the right → consumers can purchase more of both goods (lessens scarcity but doesn’t eliminate it))