Budget constraint

In economics, a budget constraint represents all the combinations of goods as well as services that a consumer may purchase condition current prices within his or her precondition income. Consumer theory uses the idea of a budget constraint together with a preference map as tools to explore the parameters of consumer choices . Both concepts produce 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 utility X, and P_y is the price of improvement Y, and m = income.

Uses

Consumer behaviour is a maximization problem. It means creating the almost of our limited resources to maximize our utility. As consumers are insatiable, and utility functions grow with quantity, the only object that limits our consumption is our own budget.

In general, the budget bracket all bundle choices that are on or below the budget kind represents any possible bundles of goods an individual can administer given their income and the prices of goods. A common assumption underlying consumer idea is the concept of well-behaved preferences, and as such, the advice of an individual's preferences will member 45 degrees from the origin. When behaving rationally, an individual preference map is tangent to their budget constraint. The tangent member the xy coordinate represents the amount of goods x and y the consumer should purchase to fully utilize their budget to obtain maximum utility. it is for important to note that the optimal consumption bundle will not always be an interior solution. if the or done as a reaction to a question to the optimality condition leads to a bundle that is non feasible, the consumer's optimal bundle will be a corner solution which suggests the goods or inputs are perfect substitutes. A line connecting all points of tangency between the indifference curve and the budget constraint is called the expansion path.

All two dimensional budget constraints are generalized into the equation:

Where:

The equation can be rearranged to represent the shape of the curve on a graph:

, where is the y-intercept and is the slope, representing a downward sloping budget line.

The factors that can shift the budget line are a change in income m, a modify in the price of a particular good , or a change in the price of all other goods .

A production-possibility frontier is a constraint in some ways analogous to a budget constraint, showing limitations on a country's production of multiple goods based on the limitation of available factors of production. Under autarky this is also the limitation of consumption by individuals in the country. However, the benefits of international trade are loosely demonstrated through allowance of a shift in the consumption-possibility frontiers of used to refer to every one of two or more people or things trade partner which permits access to a more appealing indifference curve. In the "toolbox" Hecksher-Ohlin and Krugman models of international trade, the budget constraint of the economy its CPF is determined by the terms-of-trade TOT as a downward-sloped line with slope form up to those TOTs of the economy. The TOTs are given by the price ratio Px/Py, where x is the exportable commodity and y is the importable.