5.12 : Budget Constraint I

Budget constraint helps to describe the combinations of products a consumer can afford to buy with their limited income.

For instance, a student receives a weekly allowance of $100. He spends this on purchasing books and snacks. A book costs $20 and a snack costs $5. The student can purchase different combinations of these two products. For example, he can buy four books and four snacks. Alternatively, he can buy three books and eight snacks. Each of these combinations costs exactly $100, representing the student's budget constraint.

Budget Line

The graphical representation of budget constraint is referred to as a budget line. The intercept on the x-axis represents the quantity of one good that can be bought by spending the entire amount on that good at current prices. For example, if the student spends all $100 to purchase only books at $20 each, the x-intercept shows five books. Similarly, the intercept on the y-axis represents the quantity of the second product that can be bought by spending the entire budget on that good. Here, the student could spend all $100 to buy 20 snacks at $5 each. The line that connects these two points is the budget line. It shows all the combinations of the two products the consumer can afford with their $100 allowance.