2.1 Budget Constraint and Opportunity Cost - Vocabulary

Vocabulary flashcards covering budget constraint concepts, opportunity cost, marginal utility, and related ideas from the notes.

Budget constraint

The set (and its boundary, the budget line) of all affordable combinations of two goods given income and prices; points on or inside the line are affordable, while points outside the line are not.

Opportunity cost

The value of the next-best alternative forgone when making a choice; for Alphonso, the bus tickets sacrificed to gain one more burger.

Marginal utility

The additional satisfaction obtained from consuming one more unit of a good.

Law of diminishing marginal utility

The principle that the marginal utility from each additional unit of a good declines as more of that good is consumed.

Marginal analysis

Decision-making that compares marginal costs and marginal benefits of a small change in consumption or activity.

Sunk costs

Past costs that cannot be recovered and should be ignored in current decision-making.

Slope of the budget constraint

The rate at which one good must be sacrificed to gain more of the other

Relative price

The price of one good expressed relative to another; determines the slope of the budget constraint.

Opportunity cost as price

Often the opportunity cost can be measured by the money spent on the foregone alternative; price can proxy for the next-best option’s value.

Time as opportunity cost

The value of time foregone when choosing an option; economists assign a monetary value to time to compute time-based opportunity costs.

Budget set

All combinations of two goods that are affordable (on or inside the budget constraint).

Corner solution

A consumption choice at an endpoint of the budget constraint, such as spending all budget on one good and none on the other.

Intercept (budget constraint)

Points where the budget line crosses the axes: vertical intercept is the max quantity of the vertical-axis good when the other is zero; horizontal intercept is the max quantity of the horizontal-axis good when the other is zero.