Choice Sets And Budget Constraints Concepts - Microeconomics

Front 1

"Contraints"

Back 1

Limits on the kinds of choices that are available to us.

Front 2

"Choice Set"

Back 2

All the options we can choose from our given constraints.

Front 3

"Price Takers"

Back 3

Economics agents that cannot influece the prices in the economy; i.e. you aren't going to be able to haggle down the price of a gallon of milk when you buy it at the supermarket; your individual consumer purchase does not influence the market price of milk.

Front 4

"Exogenous Income"

Back 4

Fixed income; Income is defined as exogenous if its dollar value is unaffected by prices in the economy. For example, if I budget $200 to buy pants and shirts at Walmart, I will still have $200 regardless of the price Walmart sets for its pants and shirts.

Front 5

"Budget Line" or "Budget Constraint"

Back 5

The Budget line represents all combinations of goods which, if chosen by a particular consumer, would leave no additional money left in his or her budget.

Front 6

"Opportunity Cost"

Back 6

In general, the opportunity cost of a good on the horizontal axis (in terms of the good on the vertical axis) is the slope of the budget line, while the opportunity cost of the good on the vertical axis (in terms of the good on the horizontal axis) is the inverse of the slope of the budget line.

Front 7

What happens to the budget line or budget constraint if the exogenous income doubles?

Back 7

The line shifts to the right, as you are able to purchase more goods with increased funds while prices remain constant. The slope and consequently the opportunity cost, remains the same because the ratio of prices has not changed.

Front 8

Why doesn't the opportunity cost change when exogenous income changes?

Back 8

Opportunity cost is determined by prices, not the size of my income or money budget. It wouldn't matter whether Bill Gates or I walked into Walmart, we would each face the same tradeoffs at the end of the day; we would both have to pay the same prices.

Front 9

What would happen to the budget line or budget constraint if the prices of all goods was halfed?

Back 9

The budget line would shift to the right because the real income would increase because with the same exogenous income you would be able to buy more shirts and/or pants. The slope of the budget line would remain the same however, because the ratio of prices would not have changed.

Front 10

What would happen to the budget line if the price of just one good decreased by 50% ?

Back 10

The line's slope would change, because the opportunity cost has changed. The opportunity cost would have changed because the ratio between the price of the two goods changes inevitably when the price of one good changes while the other good's price remains the same.

Front 11

"Marginal Price"

Back 11

The price of one more unit. For example, if you have a coupon that gives 50% on a pair of $20 jeans for the first six pairs, on the seventh pair the marginal price will increase from $10 to $20.

Front 12

What happens to the budget line if a change in the marginal price is introduced at some unit number on the line?

Back 12

The budget line gets "kinky" It has a point where the slope changes due to the change in the marginal price, which in effect changes the opportunity cost and thereby the slope of the budget line.

Front 13

"Endowment"

Back 13

A bundle of goods owned by a consumer and tradable for other goods. A feature of an endowment is that the consumer who owns it can always choose to consume it regardless of what the prices of goods in the market happen to be.

Front 14

What is unique about budget constraints when they shift because of a price change with an endowment?

Back 14

They budget line rotates through the point where the endowment lies, not the axis intercept of the product your changing for.

Front 15

"Endogenous Income"

Back 15

Incomes in which the money available to a person depends on the price of the goods which they are endowned with - since they have to sell some of their endowment in order to get money.