Lesson: How Individuals Make Choices Based on Their Budget Constraint


Economists see the real world as one of scarcity; i.e, a world in which people’s desires exceed what is possible. As a result, economic behavior involves trade-offs in which individuals, firms, and society must forgo something they desire to obtain things they desire more. Individuals face the trade-off 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.

As you complete this lesson, consider the essential question. By the end of the lesson, you should be able to provide a detailed explanation to this question.

Why do people make the choices they make and how economists explain those choices?

By the end of this lesson, you will be able to: 

  • calculate and graph budget constraints
  • explain opportunity sets and opportunity costs
  • evaluate the law of diminishing marginal utility
  • explain how marginal analysis and utility influence choices

As you complete this lesson, look for the key terms. Add each term to your Vocabulary Chart. You may use context clues or the Glossary to help you define each term. Then, write or draw an example to help you remember what each term means.

  • budget constraint
  • opportunity cost