utility satisfaction, usefulness, or value one obtains from consuming goods and services

Key Concepts and Summary

2.1 How Individuals Make Choices Based on Their Budget Constraint

Economists see the real world as one of scarcity: that is, a world in which people’s desires exceed what is

possible. As a result, economic behavior involves tradeoffs in which individuals, firms, and society must forgo

something that they desire to obtain things that they desire more. Individuals face the tradeoff of what

quantities of goods and services to consume. The budget constraint, which is the frontier of the opportunity

set, illustrates the range of available choices. The relative price of the choices determines the slope of the

budget constraint. Choices beyond the budget constraint are not affordable.

Opportunity cost measures cost by what we forgo in exchange. Sometimes we can measure opportunity cost in
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