Budget Constraint and Opportunity Set (Video Notes)

Flashcards covering budget constraint, opportunity set, graphical illustration, and decision-making with limited income based on the notes.

What is the budget constraint?

The set of all consumption combinations a consumer can afford given the prices of goods, when all income is spent; the boundary of the opportunity set.

What concept represents all possible consumption combinations of two goods that a consumer can afford given their income and the prices of the goods?

The Budget Line (or Budget Constraint)

What is the opportunity set?

All possible combinations of consumption a consumer can afford given the prices of goods and the individual's income (all income does not need to be spent).

How can a budget constraint be illustrated graphically?

By plotting the combinations of two goods that exhaust a given budget at their prices, producing a budget line that represents affordable bundles.

What happens when income is limited?

Consumers must choose what they need and want, allocating spending among goods and facing trade-offs.

What does opportunity cost refer to in this context?

The value of the next best alternative foregone when making a consumption choice with a limited budget.

What is the difference between a budget constraint and the opportunity set?

The budget constraint is the boundary of the opportunity set when all income is spent; the opportunity set includes all affordable bundles and does not require spending all income.