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The Rational Consumer - Personal Statement Example

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The budget constraint shift inwards when the price of a commodity rise and outwards when the price decreases (Mankiw, 2011). The price of gasoline has been increasing in the past few years. As a result, the budget…
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The Rational Consumer We all have some sort of budget constraint in our daily spending. The budget constraint shift inwards when the price of a commodity rise and outwards when the price decreases (Mankiw, 2011). The price of gasoline has been increasing in the past few years. As a result, the budget constraint for gasoline has been shifting inwards. To respond to this increase, I minimized the quantity of gasoline to an affordable amount. I have achieved this by reducing the number of times I use my car for less productive trips. If the prices continue to rise in the next few years, I might consider using public means as my mode of transport.
The alternative I have for buying gasoline is use of other types of fuels and public means of transport. However, in substituting these alternatives with buying gasoline, I must incur an opportunity cost. According to Hussain (2010), an opportunity cost is the cost incurred when one turns from using a product to using its best alternative. In this particular case, the opportunity cost for buying gasoline is the inconvenience of using public means of transport and engine malfunctions due to use of other fuels. Due to this opportunity cost, I will not be able to turn to zero consumption in the short run. However, I might later turn to zero consumption by acquiring an engine specifically made to use other fuels.
In the short run, when the price of gasoline increases, the expenses on other goods will increase especially for substitute of gasoline. The reason for this is substitution effect. Substitution effect is the relative change in consumption of a product as consumers substitute it with cheaper substitutes (Hirschey, 2008). As the price of gasoline increases, I would substitute it with its cheaper alternatives and thus the income I spend on those other goods would increase.
Reference
Hirschey, M. (2008). Managerial Economics. Mason, OH: South-Western Cengage Learning.
Hussain, T. (2010). Engineering Economics. New Delhi: Lexmi Publications Limited.
Mankiw, G. N. (2011). Principles of Economics. Mason, OH: South-Western Cengage Learning. Read More
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