Budget constraint

In economics, the budget constraint represents all a combinations of goods & services that a consumer may purchase assumption current prices within his or her condition income. Consumer theory uses the theory of a budget constraint in addition to a preference map as tools to inspect the parameters of consumer choices . Both notion shit a fix graphical representation in the two-good case. The consumer can only purchase as much as their income will allow, hence they are constrained by their budget. The equation of a budget constraint is where P_x is the price of advantage X, and P_y is the price of service Y, and m = income.

Borrowing and lending

Budget constraints can be expanded outward or contracted inward through borrowing and lending. By borrowing money in a period, ordinarily at an interest rate r, a consumer canto forgo consumption in future periods for additional consumption in the borrowing period. Choosing to borrow would expand the budget constraint in this period and contract budget constraints in future periods. Alternatively, consumers canto lend their money in the current period, commonly at a lending rate l. Lending contracts the budget constraint in the current period but expands budget constraints in future periods. According to behavioral economics, choices on borrowing and lending may also be affected by Present bias. In economics, there are two groups of presented biased individuals, contemporary individuals who are aware of their submitted bias, and naive individuals who are non aware of their present bias.