Writing a budget constraint illustrates
Budget line is to consumers what a production possibilities curve is to producers.
Here, it is the number of days of skiing Janet Bain would be willing to give up to obtain an additional day of horseback riding.
You are mostly likely to buy both games and songs in some quantity above zero. The above formulation states that the price of the good on the x-axis times the quantity of the good on the x-axis plus the price of the good on the y-axis times the quantity of the good on the y-axis has to equal income.
Budget line in economics pdf
Although only three indifference curves are shown in Figure 7. Different consumers will have different maps. Point X marks Ms. In addition, the amount spent on pizza can be written as 3P, where P is the quantity of pizza consumed. Bain is at point S, consuming 4 days of skiing and 1 day of horseback riding per semester. The remaining amount can buy you 20 songs. Bain would thus prefer point X to point T.
It is easy to go awry on the issue of the slope of the budget line: It is the negative of the price of the good on the horizontal axis divided by the price of the good on the vertical axis.
Figure 7. We now have two points on budget line 0,10 and 50,0.
Budget line example problems
The absolute value of the slope of the budget line gives the price ratio between the two goods; it is the rate at which one good exchanges for another in the market. Let us say the number of songs are represented along horizontal axis X and those of games along vertical axis Y. This means the slope of the curve is the relative price of the good on the x-axis in terms of the good on the y-axis. The above combinations will rarely be purchased by a typical consumer. You are mostly likely to buy both games and songs in some quantity above zero. It has the same amount of skiing as point X, but fewer days are spent horseback riding. This is represented by the point 6,0 on the graph. Each possible combination of the two products is then plotted to obtain a budget constraint curve. For any two goods X and Y, with good X on the horizontal axis and good Y on the vertical axis, Equation 7. The absolute value of the slope of the indifference curve shows the MRS between two goods. Point X marks Ms. The curve shows, however, that she would be willing to give up at most 1 day of skiing to obtain a third day of horseback riding shown by point U.
The budget constraint is derived from the fact that the combined spending on beer and pizza cannot exceed the available income. Heads Up! The easiest way to find these points is to plot the intercepts and connect the dots.
This is a bit odd since the slope is usually defined as the change in y divided by change in x, so be sure not to get it backward.
How to draw a budget line
Here, indifference curve B is preferred to curve A, which is preferred to curve C. Budget Line Budget line also known as budget constraint is a schedule or a graph that shows a series of various combinations of two products that can be consumed at a given income and prices. You are considering buying video games and songs for your smartphone. Unttainable combination is any combination of two products which is impossible to purchase using the given income. The axes show the quantities of the two goods. Heads Up! Our two conditions for utility maximization are satisfied at point X, where she skis 2 days per semester and spends 3 days horseback riding.
Beer is on the vertical axis y-axis and pizza is on the horizontal axis x-axis. The absolute value of the slope of the budget line gives the price ratio between the two goods; it is the rate at which one good exchanges for another in the market.
based on 87 review