key term - Feasible Consumption

Definition

Feasible consumption refers to the set of consumption bundles that an individual can afford given their budget constraint. It represents the combination of goods and services that a consumer can purchase within their limited income and prices.

5 Must Know Facts For Your Next Test

1. Feasible consumption is determined by the consumer's budget constraint, which is the combination of income and prices of goods.
2. Consumers make choices based on maximizing their utility within the feasible consumption set defined by their budget constraint.
3. The shape of the feasible consumption set is affected by changes in income and prices, which alter the budget constraint.
4. Opportunity cost plays a key role in determining the feasible consumption set, as consumers must give up the next best alternative when choosing a consumption bundle.
5. Indifference curves help consumers identify the optimal consumption bundle within their feasible consumption set by showing combinations of goods that provide equal satisfaction.

Review Questions

• Explain how a consumer's budget constraint determines their feasible consumption set.
  • A consumer's budget constraint is the maximum amount they can spend on goods and services given their income and the prices of those items. The feasible consumption set is the combination of goods and services the consumer can afford within their budget constraint. The shape and size of the feasible consumption set is determined by the consumer's income and the prices of the goods, as these factors define the budget constraint. Consumers make choices to maximize their utility within this feasible consumption set.
• Describe how changes in income and prices affect the feasible consumption set.
  • Changes in a consumer's income or the prices of goods and services will shift the budget constraint, thereby altering the feasible consumption set. An increase in income will expand the feasible consumption set, allowing the consumer to afford more goods. Conversely, a decrease in income will shrink the feasible consumption set. Similarly, an increase in the price of a good will reduce the quantity of that good the consumer can purchase within their budget, shifting the feasible consumption set. These changes in the budget constraint directly impact the set of consumption bundles that are affordable to the consumer.
• Analyze how the concept of opportunity cost is related to a consumer's feasible consumption set.
  • Opportunity cost is a fundamental principle that is closely tied to the feasible consumption set. When a consumer chooses a particular consumption bundle within their feasible set, they are forgoing the opportunity to consume the next best alternative. The value of that foregone alternative represents the opportunity cost of the chosen bundle. The shape of the feasible consumption set, as determined by the budget constraint, reflects the tradeoffs and opportunity costs the consumer faces when allocating their limited resources. Understanding opportunity cost is crucial for consumers to make optimal choices within their feasible consumption set and maximize their overall utility.

Related terms

Budget Constraint:

The budget constraint represents the maximum amount of money an individual can spend on goods and services, given their income and the prices of those items.

Opportunity Cost:

The opportunity cost is the value of the next best alternative that must be given up when making a choice.

Indifference Curve: An indifference curve shows the combinations of two goods that provide the consumer with the same level of satisfaction or utility.