Life would be easy if it was just a question of deciding what we would like most. The answer would probably be more of everything! Of course, economic decisions are not that simple, and the reason is that we are constrained in what we can choose: constrained by the amount of income, the amount of time, or any one of a number of factors. In this lecture we will analyze how consumers make choices when they face a budget constraint.
Our monetary income constrains our consumption. Image courtesy of allison.johnston on Flickr.
Keywords: Budget constraints; marginal rate of transformation; opportunity cost; constrained utility maximization; corner solutions.
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
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- Budget Constraints and the Marginal Rate of Transformation (00:10:12)
Budget Constraints and the Marginal Rate of Transformation
- Shocking the Budget Constraint (00:04:47)
Shocking the Budget Constraint
- Constrained Utility Maximization: Graphical Analysis (00:06:44)
Constrained Utility Maximization: Graphical Analysis
- Constrained Utility Maximization: Mathematical Derivation (00:14:16)
Constrained Utility Maximization: Mathematical Derivation
- Corner Solutions (00:03:03)
- Applying Constrained Utility Maximization (00:07:06)
Applying Constrained Utility Maximization
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.
These optional resources are provided for students that wish to explore this topic more fully.
See the [Perloff] companion website for an overview of the main topics covered in the chapter, as well as quizzes, applications, and other related resources.