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Constraints and Costs
People have many goals
that cannot be fully accomplished. Because people face
constraints or limitations on their behavior, they
must maneuver within those constraints.
Constraints come in many forms. Sometimes, they are
mathematically imposed. Not everyone can be above average in
intelligence, or athletic ability, or any other desirable
trait. Not everyone can be a leader--there must be followers
for leaders to exist. Not everyone can win, because the
concept of winner implies that losers must also exist.
Time and biology impose the ultimate constraint on
humans. A person's life is finite, almost always lasting
less than a mere century. If one has many goals or has
ambitious goals, the limited amount of time one has to live
may make many impossible. This means, however, that the
development of time-saving technologies, be it jet travel or
packaged cake mixes, is liberating in the sense that it
makes the constraint of time less pressing.
Income and wealth are other important constraints of
which people are aware. Often our goals require us to make
other people act in certain ways. Lacking the ability to
force them, one may try to persuade them, or one may pay
them. If one wants bread from the baker or beer from the
brewer, one pays them. Exchange of this sort takes place
because both parties to the exchange find the exchange
beneficial, i.e., it helps each side move toward its goals.
Most people claim that their money and income are not
sufficient and that they need more, which means that they
would like to influence the actions of many more people than
they in fact can. Economists call this limitation the
budget constraint.
Budget constraints reflect more
basic constraints. People have limited abilities and
limited time in which to earn income. In order to earn
income, people sacrifice leisure time. In general, the
existence of constraints means that people faced choices,
and thus costs. It means that people cannot accomplish all
their goals (satisfy all their wants), but must choose to
forgo some goals in order to accomplish others.
This point is important enough to justify spending some
time with examples. Consider the college student who wants
to do well academically, yet also wants to have an
interesting and exciting social life. The basic limitation
that this student faces is time. Each day has but 24 hours,
and each week has but seven days. If enough time is spent to
achieve a really excellent grade-point average (GPA), say
straight As, the student may have a poor or miserable social
life, or a low fun-point average (FPA). If the student
enjoys as high a FPA as time permits, there may be little or
no time for study, and grades may be very poor. This notion
of a tradeoff, that to get more of one thing, a
person must sacrifice something else, is central to the way
economists view the world.
The graph below illustrates the tradeoff that the student
faces. Points to the right of the line are not attainable,
whereas those to the left of the line and points on the line
are. Point a represents a use of time with a great
deal of studying and very little social life. Point b
represents the opposite. Point c represents a poor
use of time--the student in this case may be trying to study
when everyone else is socializing and trying to socialize
when most others are studying. In this case, a different use
of time could improve both GPA and FPA.
The tradeoff line in this example is curved. This curve
indicates that, starting from a position of no study and all
fun, devoting only a few hours to study has a big effect on
GPA but reduces FPA only a little. Then, for each additional
hour spent studying the increase in GPA becomes less and
less and the drop in FPA becomes greater and greater. In
other words, if the student is not studying much, an extra
hour with the books will help his GPA a lot and not cost him
much in lost fun. If the student is studying a lot already,
an extra hour with the books will not help his GPA much, but
will cost a lot in lost fun. Economists call this pattern
"decreasing returns," and find its presence in a great many
situations.
In our case of GPA versus FPA, there is neither money nor
prices, but there are costs. The cost of a higher GPA
is the loss of FPA that must be given up. The cost of a
higher FPA is the loss of GPA that must be given up. The
notion of cost in economics refers not just to money costs,
but to all options, whether measured in money or not, that
must be sacrificed to get something.
We next look at a budget
constraint that reflects prices and money.
Copyright
Robert Schenk
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