43 Putting It Together: Choice in a World of Scarcity
43 Putting It Together: Choice in a World of Scarcity
Summary
In this module you learned that the study of economics is about how choices are made by individuals and entities, given the fact that we can never have enough of the things we want. You learned how to:
- Explain the cost of choices and trade-offs
- Illustrate society’s trade-offs by using a production possibilities frontier (or curve)
- Explain the assumption of economic rationality by individuals and firms
- Define marginal analysis
- Differentiate between positive and normative statements
The Challenging Budget Constraints of a Student
We began this module with a discussion of the annual salaries of full-time U.S. workers with different levels of education. Let’s return to the very real economic issues that face most students when making decisions about their education.
First, we discussed the cost of choices and trade-offs and used the budget constraint model to demonstrate those costs. Each term, students make a trade-off between taking more credits in school and buying necessary items. Let’s create a budget constraint model for Camila, a community college student who is struggling to cover the cost of education. First, let’s assume that each credit hour costs $75. Camila wants to take 12 to 16 credits but also needs to pay for gas to drive between school, work, and other family responsibilities. Gas costs $3 per gallon. If she has a budget during the course of the academic term that allows her to spend a total of $1,500 on course credits and gas, what are Camila’s options?
We can use the budget constraint equation to answer this question.
Step 1. Apply the budget constraint equation to the scenario.
In Camila’s case, this works out to be
[latex]\begin{array}{l}\text{Budget}={P}_{1}\times{Q}_{1}+{P}_{2}\times{Q}_{2}\\\text{Budget}=1500\\\,\,\,\,\,\,\,\,\,\,\,\,{P}_{1}=3\left(\text{price for a gallon of gas}\right)\\\,\,\,\,\,\,\,\,\,\,\,\,{Q}_{1}=\text{gallons of gas}\left(\text{variable}\right)\\\,\,\,\,\,\,\,\,\,\,\,\,{P}_{2}=75\left(\text{price per credit hour}\right)\\\,\,\,\,\,\,\,\,\,\,\,\,{Q}_{2}=\text{number of credit hours}\left(\text{variable}\right)\end{array}[/latex]
For Camila, this is
[latex]{1500}={3}\times{Q}_{1}+{75}\times{Q}_{2}[/latex]
Step 2. Simplify the equation.
At this point we need to decide whether to solve for [latex]{Q}_{1}[/latex] or [latex]{Q}_{2}[/latex].
Remember, Camila was hoping to take at least 12 credit hours, so we know the value for [latex]{Q}_{2}[/latex]. We will solve for [latex]{Q}_{1}[/latex] because, in this equation, it represents the number of gallons of gas Camila can pay for, depending on how many credit hours she takes during the academic term.
We are going solve for [latex]{Q}_{1}[/latex]. First we will write the equation with the variables on the left to make solving easier: [latex]3Q_1+75Q_2=1500[/latex].
[latex]\begin{array}{lll}3Q_1+75Q_2=1500\\\\\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,\,3Q_1=1500-75Q_2\,\,\,\,\,\,\,\,\,\,\,\,\tex