Budget Constraint | How does it Work

What is Budget Constraint and how does it work when is influenced by its variables
Simple exercise to better understant it

1. The Budget Constraint By Marco Giusti

2. Budget Constraint definition Agenda/Outline

3. Budget Constraint definition Budget Line Agenda/Outline

4. Budget Constraint definition Budget Line Budget Set Agenda/Outline

5. Budget Constraint definition Budget Line Budget Set Variables Affecting Budget Constraint: Increasing Income Decreasing Income Increasing Prices of goods Decreasing Prices of goods Agenda/Outline

6. Budget Constraint definition Budget Line Budget Set Variables Affecting Budget Constraint: Increasing Income Decreasing Income Increasing Prices of goods Decreasing Prices of goods Conclusion Agenda/Outline

7. Budget Constraint Define the set of baskets that a consumer can purchase with a limited amount I = money income allocated to consumption P x = the price of a specific good P y = the price of all other goods x = amount purchased of a specific good y = amount purchased of all other goods P x x + P y y ≤ I

8. Budget Constraint It’ s composed by: Budget Line 8

9. Budget Constraint It’ s composed by: Budget Line Budget Set 9

10. Budget Line All combinations x and y that a consumer can purchase if he spends all of his variable income on the two goods 10 P x x + P y y = I

11. Budget Line 11 P x x + P y y = I How to draw graph representation of Budget Line

12. 12 P x x + P y y = I How to draw graph representation of Budget Line Budget Line

13. 13 P x x + P y y = I Intersection with axes How to draw graph representation of Budget Line Budget Line

14. 14 P x x + P y y = I Intersection with axes How to draw graph representation of Budget Line Budget Line

15. 15 C ƒn(x)= B Budget Line How to find the slope of ƒn :

16. 16 C ƒn(x)= B Budget Line How to find the slope of ƒn :

17. 17 ∆y y C = y B - ∆y C ƒn(x)= B Budget Line How to find the slope of ƒn :

18. 18 ∆y ∆x y C = y B - ∆y x C = x B + ∆x C ƒn(x)= B Budget Line How to find the slope of ƒn :

19. 19 ∆y ∆x y C = y B - ∆y x C = x B + ∆x C ƒn(x)= B Budget Line How to find the slope of ƒn :

20. Budget Set 20 It’s a set of all affordable bundles

21. 21 It’s a set of all affordable bundles G point show us that a given price, a consumer purchases x units and y units, and he still has money because he has not spent it all Budget Set

22. 22 Variables Affecting Budget Constraint

23. We consider an U.S. Household with Income I = $ 3.000 monthly . Suppose the consumer spends his salary just for: Food (F) U.S. average Price of Food in 2003 P F = 2,59 $ per units (*) Gasoline (G) U.S. average Price of Gasoline in Sept . 2003 P G = 1.78 $/ gallon (°) (*) US Department of Agricolture, food plans : cost of food - http://www.cnpp.usda.gov/Default.htm (°) textbook “ Microeconomics (3rd edition )”, application 4.1 page 104 23 Example of Budget Constraint

24. Example of Budget Constraint 24 gallons of Gasoline

25. Example of Budget Constraint 25 gallons of Gasoline

26. Example of Budget Constraint 26 gallons of Gasoline

27. Example of Budget Constraint 27 gallons of Gasoline

28. Example of Budget Constraint 28 gallons of Gasoline

29. Example of Budget Constraint 29 Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline

30. Example of Budget Constraint 30 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline

31. Example of Budget Constraint 31 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income?

32. Example of Budget Constraint 32 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income?

33. Example of Budget Constraint 33 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income?

34. Example of Budget Constraint 34 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income?

35. Example of Budget Constraint 35 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline How many units of food can a consumer purchase with the remaining of the Income?

36. Example of Budget Constraint 36 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline Budget LINE: All combinations of F and G that a consumer can purchase if he spends all of his Income on the two goods How many units of food can a consumer purchase with the remaining of the Income?

37. Example of Budget Constraint 37 D Suppose a Consumer has bought: G D = 900 gallons gallons of Gasoline Budget LINE: All combinations of F and G that a consumer can purchase if he spends all of his Income on the two goods Budget set, all points in this area are the affordable possibilities that a consumer can purchase without spend all the limited amount How many units of food can a consumer purchase with the remaining of the Income?

38. Properties of Budget Constraint What happens if INCOME Increase / Decrease ? 38

39. Properties of Budget Constraint What happens if INCOME Increase / Decrease ? What happens if PRICE Increase / Decrease ? 39

40. 40 40 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 Units of Food F gallon of Gasoline Increase in Income

41. 41 41 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 Units of Food F gallon of Gasoline Increase in Income

42. 42 42 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 Units of Food F gallon of Gasoline Increase in Income

43. 43 43 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline Increase in Income

44. 44 44 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline Increase in Income

45. 45 45 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline Increase in Income

46. 46 46 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Budget Set when I = $ 3.000 Units of Food F gallon of Gasoline Increase in Income

47. 47 47 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Budget Set when I = $ 3.000 Units of Food F gallon of Gasoline Increase in Income

48. 48 48 Suppose the income increase from I = $3.000 to I 2 = $ 4.500 BUDGET LINE SHIFS RIGHTWARD SLOPE REMAIN EQUAL Budget Set when I = $ 3.000 Units of Food F I = $ 4.500 Budget Set gets BIGGER gallon of Gasoline Increase in Income

49. 49 49 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 Units of Food F gallon of Gasoline Decrease in Income

50. 50 50 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 Units of Food F gallon of Gasoline Decrease in Income

51. 51 51 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 Units of Food F gallon of Gasoline Decrease in Income

52. 52 52 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline Decrease in Income

53. 53 53 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline Decrease in Income

54. 54 54 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUAL Units of Food F gallon of Gasoline Decrease in Income

55. 55 55 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUAL Units of Food F Budget Set when I = $ 3.000 gallon of Gasoline Decrease in Income

56. 56 56 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUAL Units of Food F Budget Set when I = $ 3.000 gallon of Gasoline Decrease in Income

57. 57 57 Suppose the income decrease from I = $3.000 to I 3 = $ 1.500 BUDGET LINE SHIFS LEFTWARD SLOPE REMAIN EQUAL Units of Food F Budget Set when I = $ 3.000 I = $ 1.500 Budget Set gets SMALLER gallon of Gasoline Decrease in Income

58. Change in Income Income Variable: if INCREASE: 58

59. Change in Income Income Variable: if INCREASE: 59 Slope remains Equal

60. Change in Income Income Variable: if INCREASE: 60 Slope remains Equal Budget Line shifts Rightward

61. Change in Income Income Variable: if INCREASE: 61 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward

62. Change in Income Income Variable: if INCREASE: if DECREASE: 62 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward

63. Change in Income Income Variable: if INCREASE: if DECREASE: 63 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward Slope remains Equal

64. Change in Income Income Variable: if INCREASE: if DECREASE: 64 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward Slope remains Equal Budget Line shift Leftward

65. Change in Income Income Variable: if INCREASE: if DECREASE: 65 Slope remains Equal Budget Set Bigger (Higher purchasing power) Budget Line shifts Rightward Slope remains Equal Budget Set Smaller (Lower purchasing power) Budget Line shift Leftward

66. 66 66 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon gallon of Gasoline Increase in Price of x

67. 67 67 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon gallon of Gasoline Increase in Price of x

68. 68 68 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon gallon of Gasoline Increase in Price of x

69. 69 69 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon SLOPE INCREASE gallon of Gasoline Increase in Price of x

70. 70 70 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon SLOPE INCREASE gallon of Gasoline Increase in Price of x

71. 71 71 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon SLOPE INCREASE gallon of Gasoline BUDGET LINE MOVES INWARD Increase in Price of x

72. 72 72 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon SLOPE INCREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUDGET LINE MOVES INWARD Increase in Price of x

73. 73 73 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon SLOPE INCREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUDGET LINE MOVES INWARD Increase in Price of x

74. 74 74 Suppose the price of the Gasoline increase from P G = 1,78 $/ gallon to P G2 = 2,06 $/ gallon SLOPE INCREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon Budget Set gets SMALLER gallon of Gasoline BUDGET LINE MOVES INWARD Increase in Price of x

75. 75 75 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon gallon of Gasoline Decrease in Price of x

76. 76 76 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon gallon of Gasoline Decrease in Price of x

77. 77 77 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon gallon of Gasoline Decrease in Price of x

78. 78 78 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon SLOPE DECREASE gallon of Gasoline Decrease in Price of x

79. 79 79 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon SLOPE DECREASE gallon of Gasoline Decrease in Price of x

80. 80 80 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon SLOPE DECREASE gallon of Gasoline BUDGET LINE MOVES OUTWARD Decrease in Price of x

81. 81 81 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon SLOPE DECREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUDGET LINE MOVES OUTWARD Decrease in Price of x

82. 82 82 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon SLOPE DECREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUDGET LINE MOVES OUTWARD Decrease in Price of x

83. 83 83 Suppose the price of the Gasoline decrease from P G = 1,78 $/ gallon to P G3 = 1,34 $/ gallon SLOPE DECREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon The Budget Set gets BIGGER gallon of Gasoline BUDGET LINE MOVES OUTWARD Decrease in Price of x

84. Change in Price Price of x variable: if INCREASE: 84

85. Change in Price Price of x variable: if INCREASE: 85 Slope Rises Up

86. Change in Price Price of x variable: if INCREASE: 86 Slope Rises Up Budget Line shifts Inward

87. Change in Price Price of x variable: if INCREASE: 87 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward

88. Change in Price Price of x variable: if INCREASE: if DECREASE: 88 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward

89. Change in Price Price of x variable: if INCREASE: if DECREASE: 89 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Goes Down

90. Change in Price Price of x variable: if INCREASE: if DECREASE: 90 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Goes Down Budget Line shift Outward

91. Change in Price Price of x variable: if INCREASE: if DECREASE: 91 Slope Rises Up Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Goes Down Budget Set Bigger (Higher purchasing power) Budget Line shift Outward

92. 92 92 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 gallon of Gasoline In crease in Price of y

93. 93 93 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 gallon of Gasoline In crease in Price of y

94. 94 94 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 gallon of Gasoline In crease in Price of y

95. 95 95 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 SLOPE DECREASE gallon of Gasoline In crease in Price of y

96. 96 96 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 SLOPE DECREASE gallon of Gasoline In crease in Price of y

97. 97 97 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 SLOPE DECREASE gallon of Gasoline BUGET LINE MOVES INWARD In crease in Price of y

98. 98 98 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 SLOPE DECREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUGET LINE MOVES INWARD In crease in Price of y

99. 99 99 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 SLOPE DECREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUGET LINE MOVES INWARD In crease in Price of y

100. 100 100 Suppose the price of the Food increase from P G = $ 2,59 to P F2 = $ 3,26 SLOPE DECREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon Budget Set gets SMALLER gallon of Gasoline BUGET LINE MOVES INWARD In crease in Price of y

101. 101 101 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 gallon of Gasoline Decrease in Price of y

102. 102 102 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 gallon of Gasoline Decrease in Price of y

103. 103 103 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 gallon of Gasoline Decrease in Price of y

104. 104 104 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 SLOPE INCREASE gallon of Gasoline Decrease in Price of y

105. 105 105 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 SLOPE INCREASE gallon of Gasoline Decrease in Price of y

106. 106 106 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 SLOPE INCREASE gallon of Gasoline BUGET LINE MOVES OUTWARD Decrease in Price of y

107. 107 107 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUGET LINE MOVES OUTWARD Decrease in Price of y

108. 108 108 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUGET LINE MOVES OUTWARD Decrease in Price of y

109. 109 109 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon gallon of Gasoline BUGET LINE MOVES OUTWARD Decrease in Price of y

110. 110 110 Suppose the price of the Food decrease from P G = $ 2,59 to P F3 = $ 1,98 SLOPE INCREASE Budget Set I = $ 3.000 P F = $2,59 P G =$1,78 / gallon Budget Set gets BIGGER gallon of Gasoline BUGET LINE MOVES OUTWARD Decrease in Price of y

111. Change in Price Price of y variable: if INCREASE: 111

112. Change in Price Price of y variable: if INCREASE: 112 Slope Goes Down

113. Change in Price Price of y variable: if INCREASE: 113 Slope Goes Down Budget Line shifts Inward

114. Change in Price Price of y variable: if INCREASE: 114 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward

115. Change in Price Price of y variable: if INCREASE: if DECREASE: 115 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward

116. Change in Price Price of y variable: if INCREASE: if DECREASE: 116 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Rises Up

117. Change in Price Price of y variable: if INCREASE: if DECREASE: 117 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Rises Up Budget Line shift Outward

118. Change in Price Price of y variable: if INCREASE: if DECREASE: 118 Slope Goes Down Budget Set Smaller (Lower purchasing power) Budget Line shifts Inward Slope Rises Up Budget Set Bigger (Higher purchasing power) Budget Line shift Outward

119. The Budget Constraint is useful to: Find the best solution to satisfy a need to purchase two different goods with a limited amount 119 Conclusion

120. The Budget Constraint is useful to: Find the best solution to satisfy a need to purchase two different goods with a limited amount Understand the purchasing power and how it can be affected by: 120 Conclusion

121. The Budget Constraint is useful to: Find the best solution to satisfy a need to purchase two different goods with a limited amount Understand the purchasing power and how it can be affected by: INCOME CHANGES 121 Conclusion

122. The Budget Constraint is useful to: Find the best solution to satisfy a need to purchase two different goods with a limited amount Understand the purchasing power and how it can be affected by: INCOME CHANGES PRICE CHANGES 122 Conclusion

123. 1) Income Variable if INCREASE: 123 Conclusion

124. 1) Income Variable if INCREASE: - Slope remains Equal - Budget Line shifts Rightward - Budget Set Bigger (Higher purchasing power) 124 Conclusion

125. 1) Income Variable if INCREASE: - Slope remains Equal - Budget Line shifts Rightward - Budget Set Bigger (Higher purchasing power) if DECREASE: 125 Conclusion

126. 1) Income Variable if INCREASE: - Slope remains Equal - Budget Line shifts Rightward - Budget Set Bigger (Higher purchasing power) if DECREASE: - Slope remains Equal - Budget Line shift Leftward - Budget Set Smaller (Lower purchasing power) 126 Conclusion

127. 2) Price Variable if INCREASE: 127 Conclusion

128. 2) Price Variable if INCREASE: - Slope: Rises Up ( x - axis) / Goes Down ( y - axis) - Budget Line shifts Inward - Budget Set Smaller (Lower purchasing power) 128 Conclusion

129. 2) Price Variable if INCREASE: - Slope: Rises Up ( x - axis) / Goes Down ( y - axis) - Budget Line shifts Inward - Budget Set Smaller (Lower purchasing power) if DECREASE: 129 Conclusion

130. Conclusion 2) Price Variable if INCREASE: - Slope: Rises Up ( x - axis) / Goes Down ( y - axis) - Budget Line shifts Inward - Budget Set Smaller (Lower purchasing power) if DECREASE: - Slope: Goes Down ( x - axis) / Rises Up ( y - axis) - Budget Line shift Outward - Budget Set Bigger (Higher purchasing power) 130

131. Thank You! marcogiustiexecutive.com linkedin.com/in/ giustimarco @ MarcoGiusti_IT [email protected] 131