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Wize University Microeconomics Textbook > Theory of Consumer Choice

Budget Constraint

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Budget Constraint

The budget constraint is a line that shows all the combinations of two products that you can afford to buy with the same budget.



Income (Budget) = Px(Qx) + Py (Qy)Income\ \left(Budget\right)\ =\ Px\left(Qx\right)\ +\ Py\ \left(Qy\right)


Slope of budget = −PxPySlope\ of\ budget\ =\ \frac{-Px}{Py}

Example: If your income is $100, the price of good X is $10 and the price of good Y is $20 the intercept on the Y axis would be
100/20 = 5
and the intercept on the X axis would be
100/10 = 10
. The slope of the budget line (constraint) would be
-10/20 = -0.5

If your budget increases the budget line shifts
right
and if budget decreases it shifts
left
PAGE BREAK

Slope of the Budget Constraint

If the price of one of the products changes, the slope of the budget constraint changes but it does not shift.



  • In the diagram above the price of X
    decreased
    because the amount of X we can buy increased.
  • In the diagram below the price of Y
    increased
    because the amount of Y we can buy decreased.














Practice: Budget Constraint

Suppose the budget line changes, moving to a higher Y intercept than before while maintaining the same X intercept. Which is the most likely cause for this change?
Extra Practice
What happens if income doubles and all prices double?
Practice: Budget Line
Henry consumes only two items, movies and video games. His income is $60 per month. Video games are $12 each and movies are $6. What is the equation for his budget line?
Practice: Income & Consumption
Emily has an income of $80 which she plans on spending on milk and cookies. The price of milk is $2 per liter, and the price of cookies is $4 per dozen. If Emily buys 10 dozen cookies how many liters of milk can she buy if she spends all her income?
Suppose the budget line changes, moving to a higher y-intercept than before while maintaining the same x-intercept. Which is the most likely cause for this change?
Samantha has $2,000 to spend on two goods: sandwiches and beer. The price of a sandwich is $5 and price of a beer is $4. Which diagram represents Samantha's budget line?
John consumes two goods, burgers and soda pop. Quantity of burgers consumed is on the x-axis and soda pop is on the y-axis. Suppose that the price of pop increases. The ________ of the budget line will change
Suppose in the diagram below the budget increases from BL1 to BL2. If X is an inferior good and Y is a normal good, which of the following could be a possible point for the new optimal bundle?
Suppose in the diagram below the budget decreases from BL2 to BL1. If the optimal bundle changes from combination D to combination A what can be said about the two products?
A decrease in the price of the good on the y-axis causes
An increase in the price of the good on the x-axis causes
An increase in the price of the good on the x-axis causes
A decrease in the price of the good on the y-axis causes