Final answer:
Consumers use their limited budget to purchase a combination of goods that maximize their utility. The budget constraint shows the affordable combinations of two goods based on consumer income. Diminishing marginal utility influences choices within the budget constraint.
Step-by-step explanation:
Consumers must forego choice based on a limited budget because consumers spend their limited budget purchasing a combination of goods that maximize their utility. A budget constraint (or budget line) illustrates the possible combinations of two goods that are affordable given a consumer's income. This concept is pivotal in understanding how consumers make decisions to allocate their scarce resources. Most people aim to achieve a utility-maximizing combination of choices by considering the marginal utility of consuming different quantities of goods.
For example, consider the case of José who has a fixed budget. José likes to collect T-shirts and watch movies. His budget constraint would show him the maximum number of T-shirts and movie tickets he can purchase. Within this constraint, José has to choose the combination that offers the highest total utility to him while still being affordable. Over time, as he continues to purchase a good, the additional satisfaction or marginal utility he gets from each additional unit typically decreases, a concept known as diminishing marginal utility.