Hi. Welcome to Economics. This is Kate. This tutorial is called Resource Allocation for Consumers. As always, my key terms will be in red and my examples will be in green. So what are you going to learn today? Well, in this tutorial, by the end of it, you'll be able to explain the choices that we as consumers make. You'll be able to identify the constraints that we face. And finally, you'll understand that we make choices in order to maximize our utility.
So consumers and households are two interchangeable terms. And households have to make three basic decisions. First of all, they have to decide how much to buy. When we're talking about buying things, we're talking about goods and services. So how much do we need to purchase or do we want to purchase? Once you figure that out, then we can see how much we need to work. Most of us have to work in order to afford to our goods and services.
And then finally, every household has to figure out how much to spend today, versus save for the future. For the purposes of this tutorial, I'll be focusing just on these two, how much to buy and how much to work.
We all face constraints in our life. Constraints is your first key term of this tutorial, and it's an element that creates parameters which may interrupt the achievement of a goal. So what constrained you?
Most people, I think, would agree that the two biggest constraints in their life are time and money. And that's what we'll be talking about in this tutorial. So I just drew this silly little pie chart here. I don't know if you agree with me, but I personally think that time is my most valuable resource. My time is extremely limited and scarce. And so maybe this is pretty ideal. I don't think I get that much sleep in a 24 hour period, but it would be nice if I did.
There are many things that we have to deal in a 24 hour period-- sleep, work, spend time with our family, sit down and watch a television show, I put entertainment there. There are a lot of other things that we have to do in a day, or want to do in a day. So that's just meant to show that we can't spend more than 24 hours doing something.
If I decide to sleep more, then that blue area would get bigger. It's got to come out of another chunk. I either have to work less, spend less time with my family that day, or my entertainment window gets very, very small. The labor/leisure trade-off-- a key term for you-- is this. It's a comparison between time spent working and earning income, versus time spent participating in non-work activities and earning value instead in satisfaction.
So the time we spend working is to get money to buy the things that we want. The time we spend in leisure, we're not earning a wage there, but we're earning satisfaction, we're getting gratification or utility out of that. I made a labor/leisure trade-off graph for you here, and it just shows the comparison between-- so the extremes are here and here.
If we were down here, I hope none of you are, it would mean that we are spending all 24 hours of our day in labor. So we would spend 24 hours a day working and have absolutely no leisure time at all. If we were up here, we were lucky enough to be here, we would never have to work a day in our life, because we would be spending 24 hours a day in leisure, and no time at all at work.
So everyone, obviously, is at a different position. If you decide to go to work and work a few hours, then you're going to be here. If you work a few more hours you're trading off your leisure in order to get more labor, I'm sorry. If you are working like crazy and you decide to cut back, then maybe you move up the line, more towards leisure. So most of us are somewhere in the middle.
But the point is, we all make different choices depending on our own preferences, our own situations, what our family needs are, et cetera. And that leads us to income, because we all make those decisions based on how much income we need. But income is our other constraint. It's a monetary input in exchange for capital or labor within a particular time interval.
So here's a budget constraint for you. Most of you probably have some type of budget. I have a budget. I don't always follow it. I should, I know. So these are possible budget choices of a person earning $2,000 per month. I just made these numbers up. So let's say they're looking at different apartments to rent. They could spend a little bit of money, or a whole lot of money on rent.
And then it shows that as they spend more money on rent, they have to cut down on food and other. These first three would be within our budget constraint, because they add up to how much money we're making in a month. This last option, D, would be outside of our budget constraint. It would not be affordable, so we would say it's outside of our budget constraint.
So which person are you? It really, again, is going to depend. Our choices are going to be based on our own individual preferences. The idea is that we're going to seek to maximize our own utility. So whereas one person might not mind living in a very low-end apartment, or they don't really care as much where they live, but they definitely care about the food that their purchasing, so they might opt for option A. Maybe you're not home that much.
Whereas, somebody else might be really, really concerned with where they live and want it to be very nice, and they can sacrifice in the other areas. Again, the idea is that we're constrained by our choices. We can't have it all. We can't have the top-of-the-line apartment, spend all our money on food too, and lavish activities. We have to make important choices.
And again, we're seeking to maximize our utility. Remember, utility is what we get out of something. It's our gratification we receive. So obviously our constraints are also going to vary depending on what we do for a living. I just have two examples for you here.
So an attorney might make, let's say, $200 per year. So their income might not be as much of a constraint, because they can probably purchase a lot of goods and services with $200,000 a year. But they're time constraint might be really, really tough. I would assume-- I know my father is an attorney and he works many, many, many hours. So his time is his biggest constraint.
Whereas a teacher making $45,000 per year might have a little bit more time on their hands. They might work fewer days of the year. They might have summers off. But their income is going to be a much greater constraint, because they can't purchase as much with the $45,000 as the attorney could with $200,000.
So that's the lesson for today. What did you learn? You learned that time and income are our two biggest resources, but they're also our two biggest constraints. What we have to do is make a trade-off between the hours we work and the hours we're enjoying our leisure. And we make choices. Those choices are different for everybody due to our own individual preferences. But at the end of the day, we're all seeking to maximize our own utility.
Source: Image of pie chart created by Kate Eskra, Image of Labor/Leisure graph created by Kate Eskra
An element that creates parameters which may interrupt the achievement of a goal.
Money earned in exchange for capital or labor within a particular time interval.
Comparison between time spent working and earning income, versus time spent participating in non-work activities and earning value in satisfaction.