Scenario:A friend who knows that you are learning problem solving skills and economics has come to you for advice. They have brought their family’s budget from last year, as well as their current budget for this year. At the beginning of this year, rent and the price of imported food rose. At the same time, prices for domestic food dropped. Your friend’s family’s income stayed the same, but because of these economic changes, they had to make changes to their yearly budget. Budget 1 on the left shows how their family used to spend their income of $25,000. Budget 2 on the right reflects changes your friend made to the family’s budget based on economic changes.
Your friend’s family is unhappy about the lifestyle changes that your friend has chosen. They are having a difficult time explaining the reasons for some of the decisions they have had to made about family finances. Since they know that you are studying personal finance, they have asked you to help them come up with a way to explain to their family what has happened to their spending.
Answer the following questions based on the scenario and Budget 1 and 2:
- In the first four weeks of this class you have learned about several economic concepts and how they impact daily living. Choose one economic concept from this list and explain how it is relevant to your friends' budget situation:
Supply and demand
Scarcity
Tradeoff decisions
International trade
Opportunity cost
Compound growth
- How did expenditures change between budgets? Which expenditures changed the most? Which expenditures changed the least? Which stayed the same?
- What were the economic trends that created the need for your friend’s family to change their expenditures? What can you infer about the connection between prices and expenditures, based on the economic concepts you have learned?
- Help your friend explain the rationale for their budget decisions to their family. For each expenditure change, describe why your friend made that decision and how it impacts the family overall. Also make sure to address expenditures that did not change. What are the long-term benefits/risks of these changes? Some questions you could help them answer are:
Why did your friend decide to buy less imported food, and more domestic food?
Why did your friend decide to use the furnace and air conditioning less?
Why did your friend decide to walk more?
Why did your friend not change the amount spent of education and family care?