5.13 : Budget Constraint II

The budget constraint formula links income to expenditure.

For example, John is a student whose weekly allowance of $200 represents his income. He spends his entire income on food and clothing. His total expenditure is calculated by multiplying the quantity of food purchased by its per unit price and adding it to the product of the quantity of clothes purchased and its per unit price.

Graphically, it is represented by the budget line, BL.

Bundles on or below this line BL are feasible, as John can afford them. Bundles above BL are unaffordable and so not feasible.

If John's total budget across these two items remains constant, this means he must give up some quantity of one thing to afford a greater quantity of the other.

For example, when John buys more clothing, from two to three units, he must spend less on food because his budget is fixed.

The slope of the budget line shows how much quantity of one thing John has to give up to afford more of the other with a given budget and constant prices. It is the ratio of the prices of the two products.