Decisions within a budget constraint
- The budget constraint is the boundary of the 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 in terms of what must be given up in exchange.
- Marginal analysis is the process of comparing the benefits and costs of choosing a little more or a little less of a certain good.
- The law of diminishing marginal utility indicates that as a person receives more of a good, the additional—or marginal—utility from each additional unit of the good declines.
- Sunk costs are costs that occurred in the past and cannot be recovered; they should be disregarded in making current decisions.
- Utility is the satisfaction, usefulness, or value one obtains from consuming goods and services.
What is opportunity cost?
Understanding budget constraints
|Point||Quantity of burgers at $2||Quantity of bus tickets at 50 cents|