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Constraints and Costs

We cannot fully achieve many of our goals because we face constraints or limitations on our behavior. We maneuver within those constraints trying to do the best that is possible.

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 cannot accomplish all their goals (satisfy all their wants), but must choose to forgo some goals in order to accomplish others.

For example, 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.

Higher Grades mean less fun

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.

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Copyright Robert Schenk