Every individual has in one way or another experienced a budget constraint. The case scenario often pushes someone to the extent of choosing one item over the alternative because either way, you cannot have both at that time. Therefore, the amount of benefits one gets after foregoing one thing to have the other is known as the opportunity cost. Opportunity cost is not only measured based on the monetary value but also in terms of time and other resources.
However, as much as one may try to make the right decision when having a budget constraint, at times, you may end up making the wrong decision. For instance, there was a time I was craving for a burger, so I opted to buy one and forego paying for a movie to watch with my friends. The decision I made was influenced by the fact that I could watch a movie another time because I was still around my friends and that I had been craving for a burger in a week. Unfortunately, the burger turned out to be of less quality compared to my expectations. I did not throw away the burger because I had spent the only money I had, but then I was disappointed because I could have enjoyed the movie with my friends. Such costs are referred to as sunk costs, which do not necessarily imply that I will make the wrong decisions next time.
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The moment you consume something, it becomes beneficial to you. As such, the obtained benefit is known as a utility. However, as one continues taking in more of these units, then the efficiency reduces. Therefore, the less one consumes regarding a particular commodity, the higher the utility and vice versa. The pattern is consequently known as the law of diminishing marginal utility.
