2.1 How Individuals Make Choices Based on Their Budget Constraint Flashcards
The combination of all goods, given the price of two goods and the budget amount.
Budget Constraint
______ is used to indicate what one must give up in order to obtain what he or she desires.
The value of the next best alternative.
Opportunity Cost
What is a quick way to determine the opportunity cost?
Divide the two prices
What is another term for opportunity cost?
Price
What factors impact decision making in opportunity cost
time
personal preference
____ is examining the benefits and costs of choosing a little more or a little less of a good
marginal analysis
What is utility?
The satisfaction of goods and services for the satisfaction or utility those goods and services provide.
____ is the diminishing utility of a good or service someone receives the more they use it.
Law of Diminishing Marginal Utility
What does the Law of Diminishing Marginal Utility Suggest?
That people and societies rarely make all or nothing choices.
What does the budget constraint framework suggest?
When people make choices in a world of scarcity they will use marginal analysis to decide whether they would prefer more or less.
A rational consumer would only purchase additional units of some product as long as the marginal utility _______ the opportunity cost.
Exceeds
What do all decisions involve in the budget constraint framework>
What will happen next
____ are costs incurred in the past and cannot be recovered and should not affect future decisions.
Sunk Costs
What is the lesson of sunk costs?
To forget about what is lost and focus on current and future decisions.
