Budget constraint

Budget constraint

A Budget constraint represents the combinations of goods and services that a consumer can purchase given current prices and his income. Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices. Both concepts have a ready graphical representation in the two-good case.

Uses

Individual choice

An individual consumer will choose to consume goods at the point where the most preferred available indifference curve on their preference map is tangent to their budget constraint.

International economics

A production-possibility frontiers is a budget constraint presented by 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 generally demonstrated through allowance of a shift in the consumption-possibility frontiers of each trade partner which allows access to a more appealing indifference curve.

Many goods

While low level demonstrations of budget constraints are often limited to two good situations which provide easy graphical representation, it is possible to demonstrate the relationship between multiple goods through a budget constraint.

In such a case, assuming there are n, goods, called x_i, for i=1,dots,n.,, and that the price of good x_i, is denoted by p_i.,, if ,W, is the total amount that may be spent, then the budget constraint is::sum_{i=1}^np_ix_ileq W.

Further, if the consumer spends his income entirely, the budget constraint binds::sum_{i=1}^np_ix_i=W.In this case, the consumer cannot obtain an additional unit of good x_i, without giving up some other good. For example, he could purchase an additional unit of good x_i, by giving up p_i/p_j, units of good x_j.,


Wikimedia Foundation. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • budget constraint — limitations due to limited funds …   English contemporary dictionary

  • Budget — For the rental car company, see Budget Rent a Car. For the car insurance company Budget, see Budget Group of Companies. A budget (from old French bougette, purse) is a financial plan and a list of all planned expenses and revenues. It is a plan… …   Wikipedia

  • constraint — UK US /kənˈstreɪnt/ noun [C] ► something that controls what you can do by keeping you within particular limits: »The constraint of distribution costs remains the severest of all. budget/financial, etc. constraints »This growth in revenue may… …   Financial and business terms

  • Budget-maximizing model — is an influential new stream of public choice theory and rational choice analysis in public administration inaugurated by William Niskanen, in 1971. It argued that rational bureaucrats will always and everywhere seek to increase their budgets in… …   Wikipedia

  • constraint — noun ADJECTIVE ▪ important, major ▪ severe, tight ▪ The government has placed tight constraints on spending this year. ▪ budget, budgetary …   Collocations dictionary

  • budget — {{Roman}}I.{{/Roman}} noun ADJECTIVE ▪ fixed, limited, low, modest, shoestring, small, tight ▪ The film was was made on a shoestring budget …   Collocations dictionary

  • constraint */*/ — UK [kənˈstreɪnt] / US noun Word forms constraint : singular constraint plural constraints 1) [countable, often plural] something that limits your freedom to do what you want The organization has to operate within the usual democratic constraints …   English dictionary

  • constraint — A factor of production, a shortage of which prevents an organization achieving higher levels of performance. A constraint results from the impact of a limiting factor (or principal budget factor), which must be eliminated or reduced before the… …   Accounting dictionary

  • constraint — A factor of production, a shortage of which prevents an organization achieving higher levels of performance. A constraint results from the impact of a limiting factor (or principal budget factor), which must be eliminated or reduced before the… …   Big dictionary of business and management

  • constraint — con|straint [ kən streınt ] noun * 1. ) count often plural something that limits your freedom to do what you want: LIMITATION: The organization has to operate within the usual democratic constraints. financial/environmental/budget constraints… …   Usage of the words and phrases in modern English

Share the article and excerpts

Direct link
… Do a right-click on the link above
and select “Copy Link”