Video instructions and help with filling out and completing Will Form 8815 Restrictions

Instructions and Help about Will Form 8815 Restrictions

Music Music to get a better understanding of how we make choices we first need to understand the elements that go into making a decision and not all of them are within our control the world is constantly invisibly determining the prices of goods and services the price of a cup of coffee it depends on so many variable think culture demographics the cost of beans the weather to find the mantle oil even the high rim at your hip neighborhood coffee shop you get the idea all of this economic activity is magically being simplified into a price for a cup of coffee how about your salaries the price of one hour of your labor it depends on you of course on your skills and effort but it also depends on many factors outside of your control for example the demand for your services nearby conversations even how fun your job is every day you make decision after decision about what's Devine comparing hundreds of different goods and services there are so many choices to simplify things let's think about what you would do if you had a weekly budget of $50 to spend on just two goods coffee and pizza coffee costs $5 in Pizza costs $10 so pizza is twice as expensive as coffee there are several different combinations of coffee and pizza you could buy with us money let's plot a few of your options on a graph on the x-axis we have the number of pizzas per week and on the y-axis we have the cups of coffee per week you could buy two cups of coffee and pour pizzas four cups of coffee and three pizzas five pizzas no coffee core ten cups of coffee but no pizza when you connect the different options that represent the ways you can spend your fifty dollars you get a straight line this is your budget constraint and it represents all possible combinations of coffee and peds that you can buy given your budget and the prices of coffee and pizza this budget line also separates what you can afford from what you cannot afford maybe you wish you could buy two cups of coffee and six pizzas or four cups of coffee and 10 pizzas but these are not in your budget sorry all these different combinations cost more than you have so they're unaffordable given your budget and the prices of these two goods combinations of coffee and pizza below the budget line on the other hand are within your needs so they're affordable and you can buy them if you want the budget constraint also reflects how the market substitutes between the two goods remember pizzas are twice as expensive as coffee and this simply means that the relative price of one pizza is two cups of coffee you see this on the slope of the budget constraint which is - well actually it's negative - but we're less concerned about the sign although it does remind us that having more of one good requires giving up some of the other when coffee costs $5 and pizzas cost 10 if you want an additional pizza you have to give up 2 cups of coffee if this made you think about opportunity cost you're right the slope of the budget constraint is the opportunity cost of pizza will the straight off change if your budget increases say if you find a $20 bill in the pocket of your winter jacket and now have seventy dollars to spend on these two goods No the trade-off is given by the markets prices so changes in your income do not affect the relative price of goods sure you'll be able to afford and choose between all of the consumption combinations that total seventy dollars and you can see how this makes your budget constraint shift outward but the two cups of coffee for one Pizza trade-off remains the same and that is because the market still values these two codes relative to one another just like it did before this trade-off does change if the relative price of the two goods changes think of what will happen if maybe because of a neutral good whether the price of coffee falls from five dollars to 250 does the market trade-off remain the same do pizzas just became four times more expensive than coffee so you're able to buy 4 cups of coffee when you give up eating one pizza this will make your budget constraint rotate outward notice how because nothing happened to the price of Pizza the number of pizzas you can buy when you don't buy coffee hasn't changed you can still only buy five pizzas but if you spend all of your budget on coffee just to look at how many more cups of coffee you can buy you can now buy 20 cups of coffee per week that's a lot of coffee you see a new higher relative price of pizza in terms of coffee in the slopes of the new budget constraint which is now 4 we make choices every day the reality of what we can afford given by our incomes and the prices of goods and services are all very important elements that affect our decisions but there are other elements equally important and those are our preferences we'll examine these next you're on your way to mastering economics make sure this video six by taking a few quick practice questions or if you're ready for more microeconomics click for the next video still here check out marginal revolution University's other popular videos