VIDEO
HIGHLIGHT
Log InSign up
Budget Constraints
SummaryTranscriptChat

Budget Constraints

Understanding Decision-Making in Economics

The Elements of Decision-Making

  • To comprehend how choices are made, it's essential to recognize that not all decision-making elements are within our control. External factors significantly influence prices.
  • Prices of goods and services, such as coffee, depend on various variables including culture, demographics, supply and demand, and external costs like rent.

Budget Constraints and Choices

  • When given a budget (e.g., $50 for coffee at $5 each and pizza at $10 each), multiple combinations can be plotted on a graph to visualize spending options.
  • The budget constraint line illustrates all possible combinations of coffee and pizza purchases within the budget. Options above this line are unaffordable.

Opportunity Cost

  • The slope of the budget constraint indicates opportunity cost; for instance, if pizzas cost twice as much as coffee, choosing one pizza means giving up two cups of coffee.
  • Changes in income do not affect relative prices; thus, even with an increased budget (e.g., $70), the tradeoff between goods remains constant unless market prices change.

Impact of Price Changes

  • If the price of coffee drops from $5 to $2.50 while pizza remains at $10, the relative price shifts dramatically—pizzas become four times more expensive than coffee.
  • This shift alters purchasing power significantly; consumers can now buy more cups of coffee without changing their ability to purchase pizzas.

Preferences in Economic Decisions

Playlists: Economics [Beginner] Pt.5 Principles of Economics: Microeconomics Unit 16: Consumer Choice
Video description

Think through all of the variables that determine the price of a cup of coffee. It might help to imagine the coffee beans on the farm first. Consider the land costs and the price of the farmer’s labor. What about transportation of the beans to the roaster? There are packaging costs, oil costs, driver costs...and we’re still only talking about the beans! Once the roasted beans finally make it to your local coffee shop, they still have to be turned in that cup of coffee. The cost of rent for the building is a factor in the price of the final good, as is the labor of the barista and the price of electricity in your area. We’re barely scratching the surface here, but you get the idea that a ton of variables are behind the price of even a relatively simple good like a cup of coffee. What you, the consumer, are able and willing to pay is yet another one. Your salary helps set your budget constraints. And your budget constraints are a crucial variable in helping you decide whether to spend $5 on that cup of coffee, or $5 on something else. In this video, we’ll examine what budget constraints look like and how they function by graphing a simple example: $50 to spend on $5 coffees or $10 pizzas. You’ll see how the graph shifts as variables change. We’ll also use this example talk about a fundamental concept in economics that can help you make better decisions: opportunity costs. Microeconomics Course: http://bit.ly/20VablY Next video: http://bit.ly/2rHPUY1