WEBVTT

99:59:59.999 --> 99:59:59.999
♪ [music] ♪

99:59:59.999 --> 99:59:59.999
To get a better understanding
of how we make choices,

99:59:59.999 --> 99:59:59.999
we first need to understand 
the elements that go

99:59:59.999 --> 99:59:59.999
into making a decision.

99:59:59.999 --> 99:59:59.999
And not all of them are 
within our control.

99:59:59.999 --> 99:59:59.999
The world is constantly, 
invisibly determining the prices

99:59:59.999 --> 99:59:59.999
of goods and services.

99:59:59.999 --> 99:59:59.999
Take the price of a cup of coffee.

99:59:59.999 --> 99:59:59.999
It depends on so many variables.

99:59:59.999 --> 99:59:59.999
Think culture, demographics, 
the cost of beans, the weather,

99:59:59.999 --> 99:59:59.999
the supply and demand for oil,

99:59:59.999 --> 99:59:59.999
even the high rent at your hip 
neighborhood coffee shop.

99:59:59.999 --> 99:59:59.999
You get the idea.

99:59:59.999 --> 99:59:59.999
All of this economic activity is 
magically being simplified

99:59:59.999 --> 99:59:59.999
into a price for a cup of coffee.

99:59:59.999 --> 99:59:59.999
How about your salary -- the price 
of one hour of your labor?

99:59:59.999 --> 99:59:59.999
It depends on you, of course,
on your skills and effort,

99:59:59.999 --> 99:59:59.999
but it also depends 
on many factors outside

99:59:59.999 --> 99:59:59.999
of your control -- for example, 
the demand for your services,

99:59:59.999 --> 99:59:59.999
nearby competition, 
even how fun your job is.

99:59:59.999 --> 99:59:59.999
Every day you make decision 
after decision about what to buy,

99:59:59.999 --> 99:59:59.999
comparing hundreds 
of different goods and services.

99:59:59.999 --> 99:59:59.999
There are so many choices.

99:59:59.999 --> 99:59:59.999
To simplify things, let's think 
about what you would do

99:59:59.999 --> 99:59:59.999
if you had a weekly budget of $50
to spend on just two goods,

99:59:59.999 --> 99:59:59.999
coffee and pizza.

99:59:59.999 --> 99:59:59.999
Coffee costs $5 and pizza cost $10.

99:59:59.999 --> 99:59:59.999
So pizza is twice 
as expensive as coffee.

99:59:59.999 --> 99:59:59.999
There are several different 
combinations of coffee and pizza

99:59:59.999 --> 99:59:59.999
you could buy with this money.

99:59:59.999 --> 99:59:59.999
Let's plot a few 
of your options on a graph.

99:59:59.999 --> 99:59:59.999
On the "x"-axis, we have the number
of pizzas per week.

99:59:59.999 --> 99:59:59.999
And on the "y"-axis, we have
the cups of coffee per week.

99:59:59.999 --> 99:59:59.999
You could buy two cups of coffee
and four pizzas,

99:59:59.999 --> 99:59:59.999
four cups of coffee 
and three pizzas,

99:59:59.999 --> 99:59:59.999
five pizzas with no coffee,

99:59:59.999 --> 99:59:59.999
or 10 cups of coffee but no pizza.

99:59:59.999 --> 99:59:59.999
When you connect 
to different options that represent

99:59:59.999 --> 99:59:59.999
the ways you can spend your $50,
you get a straight line.

99:59:59.999 --> 99:59:59.999
This is your budget constraint.

99:59:59.999 --> 99:59:59.999
And it represents all possible 
combinations of coffee and pizza

99:59:59.999 --> 99:59:59.999
you can buy -- given your budget
and the prices of coffee and pizza.

99:59:59.999 --> 99:59:59.999
This budget line also separates 
what you can afford

99:59:59.999 --> 99:59:59.999
from what you cannot afford.

99:59:59.999 --> 99:59:59.999
Maybe you wish you could buy
two cups of coffee and six pizzas,

99:59:59.999 --> 99:59:59.999
or four cups of coffee 
and 10 pizzas.

99:59:59.999 --> 99:59:59.999
But these are not in your budget.

99:59:59.999 --> 99:59:59.999
Sorry.

99:59:59.999 --> 99:59:59.999
All these different combinations
cost more than you have.

99:59:59.999 --> 99:59:59.999
So they're unaffordable,
given your budget

99:59:59.999 --> 99:59:59.999
and the prices of these two goods.

99:59:59.999 --> 99:59:59.999
Combinations of coffee and pizza
below the budget line,

99:59:59.999 --> 99:59:59.999
on the other hand, 
are within your means.

99:59:59.999 --> 99:59:59.999
So they're affordable,

99:59:59.999 --> 99:59:59.999
and you could buy them
if you wanted.

99:59:59.999 --> 99:59:59.999
The budget constraint also reflects
how the market substitutes

99:59:59.999 --> 99:59:59.999
between the two goods.

99:59:59.999 --> 99:59:59.999
Remember, pizzas are twice
as expensive as coffee.

99:59:59.999 --> 99:59:59.999
And this simply means 
that the relative price

99:59:59.999 --> 99:59:59.999
of one pizza is two cups of coffee.

99:59:59.999 --> 99:59:59.999
You see this on the slope
of the budget constraint,

99:59:59.999 --> 99:59:59.999
which is 2.

99:59:59.999 --> 99:59:59.999
Well, actually it's -2,
but we're less concerned

99:59:59.999 --> 99:59:59.999
about the sign.

99:59:59.999 --> 99:59:59.999
Although, it does remind us
that having more of one good

99:59:59.999 --> 99:59:59.999
requires giving up 
some of the other.