Economizing and Budget Constraints (Video Notes)

A set of vocabulary flashcards covering budget lines, trade-offs, and opportunity costs from the video notes.

Budget Line (budget constraint)

A line that shows the various combinations of two goods a consumer can purchase with a given money income at current prices; points on the line use all income, points below are affordable, and points above are unattainable.

Attainable vs Unattainable Points

Attainable points lie on or below the budget line; unattainable points lie above it because they require more income than is available.

Slope of the Budget Line

The rate at which one good can be traded for another along the budget line; typically negative and equal to minus the ratio of prices (dy/dx = - price of good on x-axis / price of good on y-axis). For the gift-card example, slope = -1/2.

Opportunity Cost

The value of the next-best alternative forgone when choosing more of one good over another; e.g., buying one extra book costs half a movie, and buying one extra movie costs two books.

Trade-offs

The concept that, with limited resources, gaining more of one good requires giving up some of another.

Prices and Income

Prices determine how much of each good you can buy; income is the total money available. Together they determine the budget line.

Gift Card Budget Line Example

A $120 gift card with movies at $20 and books at $10 creates a budget line with endpoints (12 books, 0 movies) and (0 books, 6 movies), illustrating affordable combinations.

Endpoints of Budget Line

The maximum quantity of one good when the other is zero; for the gift-card example: 12 books or 6 movies.

Constant Opportunity Cost

If prices are constant, the budget line has a constant slope, so the opportunity cost of one good in terms of the other remains the same along the line.

Two-Good Model

A simple framework for analyzing choices between two goods using a budget line to show feasible combinations.

Coffee and Cookies Budget Line Example

A small-group exercise with a $25 budget where coffee costs $5 and cookies cost $2.50; used to draw a budget line and discuss slope and interpretation.

Slope in Coffee-Cookie Example

The slope is -2, meaning for each additional cup of coffee you give up 2 cookies.

Affordability and Underutilization

Points on the budget line exhaust income; points below line are affordable but underutilize income.

Attainable vs Unattainable Interpretations

Points above the budget line are not affordable given income, while points on/below are affordable.