Chapter 2: Budget Constraint
Economists assume that consumers choose the best bundle that they can afford.
The consumption bundle (X , X )1tel2s us how much the consumer is choosing to consume each
- The budget constraint:
The budget constraint requires that the amount of money the consumer is spending on the two
goods can be no more than the total amount that the consumer has to spend = budget set
The two good assumption allows you to think of good 1 as one good, and good 2 as everything
else that the consumer could be spending their money on.
- Which gives us this equation:
- Because the amount of money spent on good one plus the amount of money spent on all
other goods cannot be more than total income
The budget line is the set of bundles that costs exactly m, or income.
- Slope of the budget line:
The slope of the budget line measures the opportunity cost of consuming good 1. In order to
consume more of good 1, you have to give up some consumption of good 2.
- An increase in income will cause a shift out of the b