Budget Constraint | How does it Work
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The document discusses the concept of budget constraints, which defines the set of goods a consumer can purchase given limited income and varying prices of goods. It covers the budget line, which represents all combinations of two goods a consumer can afford, and the factors that affect budget constraints, such as changes in income and prices. The document provides examples and graphical representations to illustrate how budget constraints shift with changes in these variables.
Budget Constraint | How does it Work
- 1. The Budget Constraint By Marco Giusti
- 2. 1. Budget Constraint definition Agenda/Outline
- 3. 1. Budget Constraint definition 2. Budget Line Agenda/Outline
- 4. 1. Budget Constraint definition 2. Budget Line 3. Budget Set Agenda/Outline
- 5. 1. Budget Constraint definition 2. Budget Line 3. Budget Set 4. Variables Affecting Budget Constraint: Increasing Income Decreasing Income Increasing Prices of goods Decreasing Prices of goods Agenda/Outline
- 6. 1. Budget Constraint definition 2. Budget Line 3. Budget Set 4. Variables Affecting Budget Constraint: Increasing Income Decreasing Income Increasing Prices of goods Decreasing Prices of goods 5. Conclusion Agenda/Outline
- 7. 1. Budget Constraint Define the set of baskets that a consumer can purchase with a limited amount I = money income allocated to consumption Px = the price of a specific good Py = the price of all other goods x = amount purchased of a specific good y = amount purchased of all other goods Pxx + Py y ≤ I
- 8. 1. Budget Constraint It’ s composed by: Budget Line 8
- 9. 1. Budget Constraint It’ s composed by: Budget Line Budget Set 9
- 10. 2. Budget Line All combinations x and y that a consumer can purchase if he spends all of his variable income on the two goods 10 Pxx + Py y = I
- 11. 2. Budget Line 11 Pxx + Py y = I How to draw graph representation of Budget Line
- 12. 12 Pxx + Py y = I How to draw graph representation of Budget Line 2. Budget Line
- 13. 13 Pxx + Py y = I Intersection with axes How to draw graph representation of Budget Line 2. Budget Line
- 14. 14 Pxx + Py y = I Intersection with axes How to draw graph representation of Budget Line 2. Budget Line
- 15. 15 C ƒn(x)= B 2. Budget Line How to find the slope of ƒn:
- 16. 16 C ƒn(x)= B 2. Budget Line How to find the slope of ƒn:
- 17. 17 ∆y yC = yB - ∆y C ƒn(x)= B 2. Budget Line How to find the slope of ƒn:
- 18. 18 ∆y ∆x yC = yB - ∆y xC = xB + ∆x C ƒn(x)= B 2. Budget Line How to find the slope of ƒn:
- 19. 19 ∆y ∆x yC = yB - ∆y xC = xB + ∆x C ƒn(x)= B 2. Budget Line How to find the slope of ƒn:
- 20. 3. Budget Set 20 It’s a set of all affordable bundles 0
- 21. 21 It’s a set of all affordable bundles G point show us that a given price, a consumer purchases x units and y units, and he still has money because he has not spent it all 0 3. Budget Set
- 22. 22 4. Variables Affecting Budget Constraint
- 23. We consider an U.S. Household with Income I = $ 3.000 monthly. Suppose the consumer spends his salary just for: Food (F) U.S. average Price of Food in 2003 PF = 2,59 $ per units (*) Gasoline (G) U.S. average Price of Gasoline in Sept. 2003 PG = 1.78 $/gallon (°) (*) US Department of Agricolture, food plans: cost of food - http://www.cnpp.usda.gov/Default.htm (°) textbook “Microeconomics (3rd edition)”, application 4.1 page 104 23 Example of Budget Constraint
- 24. Example of Budget Constraint 24 gallons of Gasoline 0
- 25. Example of Budget Constraint 25 gallons of Gasoline
- 26. Example of Budget Constraint 26 gallons of Gasoline
- 27. Example of Budget Constraint 27 gallons of Gasoline 0
- 28. Example of Budget Constraint 28 gallons of Gasoline 0
- 29. Example of Budget Constraint 29 Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline 0
- 30. Example of Budget Constraint 30 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline 0
- 31. Example of Budget Constraint 31 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income? 0
- 32. Example of Budget Constraint 32 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income? 0
- 33. Example of Budget Constraint 33 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income? 0
- 34. Example of Budget Constraint 34 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income? 0
- 35. Example of Budget Constraint 35 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income? 0
- 36. Example of Budget Constraint 36 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline Budget LINE: All combinations of F and G that a consumer can purchase if he spends all of his Income on the two goods How many units of food can a consumer purchase with the remaining of the Income? 0
- 37. Example of Budget Constraint 37 D Suppose a Consumer has bought: GD = 900 gallons gallons of Gasoline Budget LINE: All combinations of F and G that a consumer can purchase if he spends all of his Income on the two goods Budget set, all points in this area are the affordable possibilities that a consumer can purchase without spend all the limited amount How many units of food can a consumer purchase with the remaining of the Income? 0
- 38. Properties of Budget Constraint What happens if INCOME Increase / Decrease? 38
- 39. Properties of Budget Constraint What happens if INCOME Increase / Decrease? What happens if PRICE Increase / Decrease? 39
- 40. 4040 Suppose the income increase from I = $3.000to I2 = $ 4.500 Units of Food F gallon of Gasoline 0 Increase in Income
- 41. 4141 Suppose the income increase from I = $3.000to I2 = $ 4.500 Units of Food F gallon of Gasoline 0 Increase in Income
- 42. 4242 Suppose the income increase from I = $3.000to I2 = $ 4.500 Units of Food F gallon of Gasoline 0 Increase in Income
- 43. 4343 Suppose the income increase from I = $3.000to I2 = $ 4.500 SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline 0 Increase in Income
- 44. 4444 Suppose the income increase from I = $3.000to I2 = $ 4.500 SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline 0 Increase in Income
- 45. 4545 Suppose the income increase from I = $3.000to I2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline 0 Increase in Income
- 46. 4646 Suppose the income increase from I = $3.000to I2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Budget Set when I = $ 3.000 Units of Food F gallon of Gasoline 0 Increase in Income
- 47. 4747 Suppose the income increase from I = $3.000to I2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Budget Set when I = $ 3.000 Units of Food F gallon of Gasoline 0 Increase in Income
- 48. 4848 Suppose the income increase from I = $3.000to I2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Budget Set when I = $ 3.000 Units of Food F I = $ 4.500 Budget Set gets BIGGER gallon of Gasoline 0 Increase in Income
- 49. 4949 Suppose the income decrease from I = $3.000to I3 = $ 1.500 Units of Food F gallon of Gasoline 0 Decrease in Income
- 50. 5050 Suppose the income decrease from I = $3.000to I3 = $ 1.500 Units of Food F gallon of Gasoline 0 Decrease in Income
- 51. 5151 Suppose the income decrease from I = $3.000to I3 = $ 1.500 Units of Food F gallon of Gasoline 0 Decrease in Income
- 52. 5252 Suppose the income decrease from I = $3.000to I3 = $ 1.500 SLOPE REMAIN EQUALUnits of Food F gallon of Gasoline 0 Decrease in Income
- 53. 5353 Suppose the income decrease from I = $3.000to I3 = $ 1.500 SLOPE REMAIN EQUALUnits of Food F gallon of Gasoline 0 Decrease in Income
- 54. 5454 Suppose the income decrease from I = $3.000to I3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUALUnits of Food F gallon of Gasoline 0 Decrease in Income
- 55. 5555 Suppose the income decrease from I = $3.000to I3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUALUnits of Food F Budget Set when I = $ 3.000 gallon of Gasoline 0 Decrease in Income
- 56. 5656 Suppose the income decrease from I = $3.000to I3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUALUnits of Food F Budget Set when I = $ 3.000 gallon of Gasoline 0 Decrease in Income
- 57. 5757 Suppose the income decrease from I = $3.000to I3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUALUnits of Food F Budget Set when I = $ 3.000 I = $ 1.500 Budget Set gets SMALLER gallon of Gasoline 0 Decrease in Income
- 58. Change in Income Income Variable: – if INCREASE: 58
- 59. Change in Income Income Variable: – if INCREASE: 59 Slope remains Equal
- 60. Change in Income Income Variable: – if INCREASE: 60 Slope remains Equal Budget Line shifts Rightward
- 61. Change in Income Income Variable: – if INCREASE: 61 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward
- 62. Change in Income Income Variable: – if INCREASE: – if DECREASE: 62 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward
- 63. Change in Income Income Variable: – if INCREASE: – if DECREASE: 63 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward Slope remains Equal
- 64. Change in Income Income Variable: – if INCREASE: – if DECREASE: 64 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward Slope remains Equal Budget Line shift Leftward
- 65. Change in Income Income Variable: – if INCREASE: – if DECREASE: 65 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward Slope remains Equal Budget Set Smaller (Lower purchasing power) Budget Line shift Leftward
- 66. 6666 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon gallon of Gasoline 0 Increase in Price of x
- 67. 6767 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon gallon of Gasoline 0 Increase in Price of x
- 68. 6868 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon gallon of Gasoline 0 Increase in Price of x
- 69. 6969 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon SLOPE INCREASE gallon of Gasoline 0 Increase in Price of x
- 70. 7070 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon SLOPE INCREASE gallon of Gasoline 0 Increase in Price of x
- 71. 7171 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon SLOPE INCREASE gallon of Gasoline BUDGET LINE MOVES INWARD 0 Increase in Price of x
- 72. 7272 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon SLOPE INCREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline BUDGET LINE MOVES INWARD 0 Increase in Price of x
- 73. 7373 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon SLOPE INCREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline BUDGET LINE MOVES INWARD 0 Increase in Price of x
- 74. 7474 Suppose the price of the Gasoline increase from PG= 1,78 $/gallonto PG2= 2,06 $/gallon SLOPE INCREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon Budget Set gets SMALLER gallon of Gasoline BUDGET LINE MOVES INWARD 0 Increase in Price of x
- 75. 7575 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon gallon of Gasoline 0 Decrease in Price of x
- 76. 7676 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon gallon of Gasoline 0 Decrease in Price of x
- 77. 7777 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon gallon of Gasoline 0 Decrease in Price of x
- 78. 7878 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon SLOPE DECREASE gallon of Gasoline 0 Decrease in Price of x
- 79. 7979 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon SLOPE DECREASE gallon of Gasoline 0 Decrease in Price of x
- 80. 8080 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon SLOPE DECREASE gallon of Gasoline BUDGET LINE MOVES OUTWARD 0 Decrease in Price of x
- 81. 8181 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon SLOPE DECREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline BUDGET LINE MOVES OUTWARD 0 Decrease in Price of x
- 82. 8282 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon SLOPE DECREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline BUDGET LINE MOVES OUTWARD 0 Decrease in Price of x
- 83. 8383 Suppose the price of the Gasoline decrease from PG= 1,78 $/gallonto PG3= 1,34 $/gallon SLOPE DECREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon The Budget Set gets BIGGER gallon of Gasoline BUDGET LINE MOVES OUTWARD 0 Decrease in Price of x
- 84. Change in Price Price of x variable: – if INCREASE: 84
- 85. Change in Price Price of x variable: – if INCREASE: 85 Slope Rises Up
- 86. Change in Price Price of x variable: – if INCREASE: 86 Slope Rises Up Budget Line shifts Inward
- 87. Change in Price Price of x variable: – if INCREASE: 87 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward
- 88. Change in Price Price of x variable: – if INCREASE: – if DECREASE: 88 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward
- 89. Change in Price Price of x variable: – if INCREASE: – if DECREASE: 89 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Goes Down
- 90. Change in Price Price of x variable: – if INCREASE: – if DECREASE: 90 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Goes Down Budget Line shift Outward
- 91. Change in Price Price of x variable: – if INCREASE: – if DECREASE: 91 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Goes Down Budget Set Bigger (Higher purchasing power) Budget Line shift Outward
- 92. 9292 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 gallon of Gasoline 0 Increase in Price of y
- 93. 9393 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 gallon of Gasoline 0 Increase in Price of y
- 94. 9494 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 gallon of Gasoline 0 Increase in Price of y
- 95. 9595 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 SLOPE DECREASE gallon of Gasoline 0 Increase in Price of y
- 96. 9696 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 SLOPE DECREASE gallon of Gasoline 0 Increase in Price of y
- 97. 9797 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 SLOPE DECREASE gallon of Gasoline 0 BUGET LINE MOVES INWARD Increase in Price of y
- 98. 9898 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 SLOPE DECREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline 0 BUGET LINE MOVES INWARD Increase in Price of y
- 99. 9999 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 SLOPE DECREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline 0 BUGET LINE MOVES INWARD Increase in Price of y
- 100. 100100 Suppose the price of the Food increase from PG= $ 2,59to PF2= $ 3,26 SLOPE DECREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon Budget Set gets SMALLER gallon of Gasoline 0 BUGET LINE MOVES INWARD Increase in Price of y
- 101. 101101 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 gallon of Gasoline 0 Decrease in Price of y
- 102. 102102 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 gallon of Gasoline 0 Decrease in Price of y
- 103. 103103 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 gallon of Gasoline 0 Decrease in Price of y
- 104. 104104 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 SLOPE INCREASE gallon of Gasoline 0 Decrease in Price of y
- 105. 105105 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 SLOPE INCREASE gallon of Gasoline 0 Decrease in Price of y
- 106. 106106 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 SLOPE INCREASE gallon of Gasoline 0 BUGET LINE MOVES OUTWARD Decrease in Price of y
- 107. 107107 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline 0 BUGET LINE MOVES OUTWARD Decrease in Price of y
- 108. 108108 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline 0 BUGET LINE MOVES OUTWARD Decrease in Price of y
- 109. 109109 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon gallon of Gasoline 0 BUGET LINE MOVES OUTWARD Decrease in Price of y
- 110. 110110 Suppose the price of the Food decrease from PG= $ 2,59to PF3= $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 PF = $2,59 PG=$1,78 /gallon Budget Set gets BIGGER gallon of Gasoline 0 BUGET LINE MOVES OUTWARD Decrease in Price of y
- 111. Change in Price Price of y variable: – if INCREASE: 111
- 112. Change in Price Price of y variable: – if INCREASE: 112 Slope Goes Down
- 113. Change in Price Price of y variable: – if INCREASE: 113 Slope Goes Down Budget Line shifts Inward
- 114. Change in Price Price of y variable: – if INCREASE: 114 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward
- 115. Change in Price Price of y variable: – if INCREASE: – if DECREASE: 115 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward
- 116. Change in Price Price of y variable: – if INCREASE: – if DECREASE: 116 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Rises Up
- 117. Change in Price Price of y variable: – if INCREASE: – if DECREASE: 117 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Rises Up Budget Line shift Outward
- 118. Change in Price Price of y variable: – if INCREASE: – if DECREASE: 118 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Rises Up Budget Set Bigger (Higher purchasing power) Budget Line shift Outward
- 119. The Budget Constraint is useful to: – Find the best solution to satisfy a need to purchase two different goods with a limited amount 119 5. Conclusion
- 120. The Budget Constraint is useful to: – Find the best solution to satisfy a need to purchase two different goods with a limited amount – Understand the purchasing power and how it can be affected by: 120 5. Conclusion
- 121. The Budget Constraint is useful to: – Find the best solution to satisfy a need to purchase two different goods with a limited amount – Understand the purchasing power and how it can be affected by: INCOME CHANGES 121 5. Conclusion
- 122. The Budget Constraint is useful to: – Find the best solution to satisfy a need to purchase two different goods with a limited amount – Understand the purchasing power and how it can be affected by: INCOME CHANGES PRICE CHANGES 122 5. Conclusion
- 123. 1) Income Variable – if INCREASE: 123 5. Conclusion
- 124. 1) Income Variable – if INCREASE: - Slope remains Equal - Budget Line shifts Rightward - Budget Set Bigger (Higher purchasing power) 124 5. Conclusion
- 125. 1) Income Variable – if INCREASE: - Slope remains Equal - Budget Line shifts Rightward - Budget Set Bigger (Higher purchasing power) – if DECREASE: 125 5. Conclusion
- 126. 1) Income Variable – if INCREASE: - Slope remains Equal - Budget Line shifts Rightward - Budget Set Bigger (Higher purchasing power) – if DECREASE: - Slope remains Equal - Budget Line shift Leftward - Budget Set Smaller (Lower purchasing power) 126 5. Conclusion
- 127. 2) Price Variable – if INCREASE: 127 5. Conclusion
- 128. 2) Price Variable – if INCREASE: - Slope: Rises Up (x - axis) / Goes Down (y - axis) - Budget Line shifts Inward - Budget Set Smaller (Lower purchasing power) 128 5. Conclusion
- 129. 2) Price Variable – if INCREASE: - Slope: Rises Up (x - axis) / Goes Down (y - axis) - Budget Line shifts Inward - Budget Set Smaller (Lower purchasing power) – if DECREASE: 129 5. Conclusion
- 130. 5. Conclusion 2) Price Variable – if INCREASE: - Slope: Rises Up (x - axis) / Goes Down (y - axis) - Budget Line shifts Inward - Budget Set Smaller (Lower purchasing power) – if DECREASE: - Slope: Goes Down (x - axis) / Rises Up (y - axis) - Budget Line shift Outward - Budget Set Bigger (Higher purchasing power) 130