Question

please write an essay about "how individuals make choices based on their budget constraints." for about 600 words. thanks!

Answer 1

When we go shopping for goods and services, we have a budget in mind. Our shopping habits depend on our income. Individuals create a budget for everything and all their decisions are based on the set budget. Human wants and desires are unlimited, however the resources are very limited. Consumers do not spend their entire income on consumption, only a part of it goes on consumption. The budget constraint is also influenced by several factors. Thus, a budget constrain refers to the goods and services that an individual can buy according to his budget at the prevailing market price.

Individuals attempt to get most out their money when they make choices. When faced with a budget constraint, consumers face a situation where they have to decide on what quantity to consume. They face a trade-off between the different options available. A consumer’s basket comprises of a variety of goods and services that provide the consumer with different levels of satisfaction.

Factors that influence the budget constraint are Utility/Satisfaction, Marginal rate of substitution and opportunity cost.

Utility or satisfaction refers to the amount of fulfilment that an individual gains from consumption of a good or a commodity. Generally observed that as a consumer consumes more and more units of the commodity, the utility or satisfaction obtained reduces. Eg. When mango’s are in season, the utility obtained from the 1st unit will be the highest as compared to all the other units. As more units of mango are consumed, lower is the satisfaction.

Opportunity cost refers to the loss in utility caused due to choosing of one commodity over the other. OC is the cost of one item that is lost due to choosing the other good. Eg. a consumer has $5 and can spend it on buying food or taking the bus home. If the consumer choosing to take the bus, the opportunity cost of the bus is staying hungry till he/she gets home.

Marginal Rate of substitution refers to the rate at which a consumer is ready to substitute one good for an extra quantity of another. Eg. If a consumer has mangos and wants apples. In the beginning, he will be willing to give 3 mangoes for one apple, for the next unit of apple he will give 2 mangoes and, in this way, the MRTS will keep reducing.

These factors work exactly as mentioned in the example. Consumers will choose and alter their basket of goods based on what is their need and what gives them more satisfaction. Consumer decisions are not based on affected by past costs. They are only based on the existing costs. Consumers can make changes only within the basket of goods and not the budget constraint. Consumers can choose between the quantity and quality to make the most out of the existing budge. Eg. Sam’s basket consists of a t-shirt and bananas. Let us say his constraint is $50. H&M t-shirt costs $50 a piece, primark $15 a piece, Banana from target Cost $5 a piece and Banan from local vendor $2 per piece. He has multiple choice by changing combinations here. He can choose between an H&M t-shirt that will cost him $50 a piece and give up on bananas. He can buy primark t-shirts that cost him $15 per piece and buy 2 t-shirts and buy bananas with the rest. He can also choose between the 2 banana’s with different prices.