Lesson 1306 of 1524
Choice in a World of Scarcity
The budget constraint, which is the frontier of the opportunity set, illustrates the range of available choices.
Practice this chapterThe budget constraint, which is the frontier of the opportunity set, illustrates the range of available choices. The relative price of the choices determines the slope of the budget constraint.
Choices beyond the budget constraint are not affordable Opportunity cost measures cost by what we forgo in exchange.
budget constraint — all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set. opportunity set — all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. opportunity cost — measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative. productive efficiency — when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service).
Worked example
What does “budget constraint” mean in Choice in a World of Scarcity?
- 1Use the wording this chapter gives for budget constraint.
- 2The book says: all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set.
- 3Do not use the meaning of opportunity set. That term means all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.
Result: all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set
Why. That is the meaning this chapter gives for budget constraint.
Do not swap budget constraint and opportunity set. budget constraint means all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set. opportunity set means all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.
Practice margin
This chapter
A fresh set from this chapter only. Choose 10 or 20. Multiple choice and fill-in, with no repeat inside the set.