|Posted on February 2, 2016 at 9:45 AM|
The No Bull Economics video below introduces the concept of a budget line or budget constraint. In this example, an individual is deciding how many swimsuits and pairs of flip flops to purchase before beach season. A budget line is comprised of the different combinations of these goods that the consumer can afford. Te consumer can afford any combination on the line and inside the line, but cannot afford any combination outside the line. The main ideas behind an individual's budget line is similar to a constant-cost production possibilities frontier. A budget line looks at the different combinations of goods that an individual can afford while a production possibilities frontier looks at the different combinations of goods that an economy can produce. This is an excellent example of opportunity cost.
To determine the utility-maximizing combination of goods to purchase, use this formula.