● Existing Prices
Basic Household Decisions
● How much to demand (spending)
● How much labor to supply (work time)
● Now vs. Later allocation
● Budget Constraint: limits imposed by income, wealth, and existing prices.
● Opportunity Set: set of options defined and limited by budget constraint.
● Real Income: set of opportunities to purchase real goods and services.
Budget Constraint Example
● Pizza slices cost $3.00 each
● Drafts are $1.50 each
● Your budget is $30
● (max consumption chart on slide)
● Max output graph represents opportunity set, line and region under the line
Budget Constraint Equation
Px * X + Py * Y = Income
● Px= price of commodity X