Budget Constraint

man, wouldn't it be nice to just have an infinite amount of money and you could just buy whatever you wanted? Well, unfortunately, that's not the real case. We're gonna be dealing with a budget and what we call a budget constraint. Let's check it out. So, a budget constraint, it's gonna show us the limitations on what you can afford, right? The budget tells us what we can afford and not afford, Right? It puts us kind of grounded on earth and says, hey, this is actually how much money you actually have. Right? So, we're gonna be dealing with this concept of income. This is the consumer's income and it's the fixed amount of money available to spend. All right, we're gonna leave the income constant um as we as we flow through this budget constraints, Right? And this income, it doesn't necessarily have to be all the money that they make, right? The income could just be the income set aside for this these products, right? Or for this type of good disposable income, right? You've already paid all your other things and you have this little bit of income left over to spend on what you want, Right? So, this income is going to be this fixed amount of money available to spend. And what we're gonna do when we deal with the budget constraint, we're gonna choose between various combinations of two goods that you can afford. Right? So, we're still thinking about affording these goods, but we're gonna focus on two goods, Right? We can either afford so much of one good, so much of another. Good or some combination of the two? Alright, so let's dive right into our example. I think that's gonna be the best way to explain this. And let's see here we've got party boy paul he spends all of his income whopping $18 on two goods, vodka and beer. So vodka sells for $6 and beer sells for $3. All right, so this is the information we need. We need his income and we need some price levels for the goods. Right? We now know that information. We've got $18 and then prices of six and three. So, we want to complete the table and show PVP s that's party boy paul's budget constraint on the graph. Alright, so let's start here in the table on the right hand side, and then we'll get to the graph. So the first thing you wanna do when you deal with the budget constraint you wanna know the maximum you could buy of each good. If you were only to buy that good, how much could you buy? Alright, so this almost takes us back to like pre algebra in this case, right? Where we're told you have $18 vodka shots are $6 How many vodka shots can you afford? Right, so that's the idea here you have $18 to spend, and vodka shots are $6 right? So if we take the 18 and divided by the $6 price. Well, that tells us how many vodka shots you can afford you can afford three vodka shots, right? With $18 at a price of six. How about beer? Well the maximum amount of beer, it's gonna be the same thing if you took your $18 and divided it by the price. The price of beer being three, right, $18 divided by three. Well you can afford six beers. Alright, six beers or three vodkas? Not both, Right? Because you spend all your money on vodka or all your money on beer and that's what you would get. So our formula for our maximum quantity. Well that's pretty easy, right? The max quantity we just dealt with it, it's going to equal the income divided by the price. Okay that is our maximum quantity there and that's how we solve for the maximum quantity of vodka and the maximum quantity of beers. So let's go ahead and move this information onto our graph. So notice first our axes, our X and Y. Axis. It's not quantity and price. We've got two quantities. We've got quantity on the X. Axis and quantity on the Y axis. So we need to label which good is on which axis, we're gonna put vodka up here on the Y. Axis and beer on the X. Axis. Alright. It doesn't matter which is which as long as you're consistent. Okay in this case we're gonna stick with this, we're gonna do more examples using party boy paul and we're gonna leave vodka here on the Y axis. Okay, so let's see the quantity of vodka, the max, some of them he could get is three vodkas when he has zero beer. Right? So that would be up here. He would have three vodkas and zero beer. And the opposite. If he had zero vodka, he could afford six beers out here, that would be six right there. Cool. So, now that we have two points on the budget budget constraint. Well, it's just gonna be a line, a budget constraint is just a line connecting these two points. And it couldn't be easier. We're just gonna connect it. And that is our budget constraint right there. This red line that is the budget constraint sometimes called the budget line. Okay, so the budget constraint right there. Alright, so now let's think about a few different combinations of goods, Right? Because you could buy three vodkas and zero beers or 66 beers and zero vodka. But what if you wanted a little bit of both? Right. Maybe some vodka and some beer. Let's think about what could happen, right? We could afford a few different things. We could afford something like say right here on our budget line, right? This this combination of two beers and two vodka. That's still something affordable. Just like something down here, four beers and one vodka, Right? That would be something we can afford. And let's just as an example, let's do this one where we have two beers and two vodka. I'm gonna do it here underneath. And then we'll move on to the boxes down there. So if you had two beers and two vodka, let's start with the vodka. The vodka had a price of six. And you bought two of them plus the beer having a price of three times two. Right? You bought two beers also and I'm just showing you that different points along the budget constraint can also are also affordable, right? As we move along the line. So $6 times two. That's 12, 3 times two is six. That's $18. Right? So that's still within his budget. He's using all his income, Right? And we'll notice that when we're on the budget constraint when we're on that line. That's when we're using all of our income. Okay, When we're on the line we're using all of our income. But now let's think about something like this. What if we were in a situation where we bought just one beer and one vodka, Right? If if we bought one beer and one vodka. Well that would still be affordable. Right? That's still affordable to party boy paul here, one beer and one vodka. Let's see what the price would be. Well one vodka would run him $6.01 beer would run him $3. So that would be $9. Right? That's affordable to him. He can have he has up to $18. But he only spent nine in that case. Alright, so that is affordable, compare that to something unaffordable. Let's say something like this where he's got four beers and four vodkas out here, Right? That that price way out there. Well what happens there if we've got four vodka and four beer? Well now we've got a price of $6 times the four vodka Plus a price of $3 times the four beers, right? This is 24, this is 12, we end up with $36 and he doesn't have $36 to spend. That's unaffordable to him. So what we're gonna see is I'm gonna highlight right here everything inside this area down here, this green area. This is all affordable to party boy paul. Okay, he can afford everything up to the budget line, right? That is all affordable. And I'm gonna leave this green right here where blue I'm gonna do for unaffordable over here. That's gonna be everything beyond the budget line. Right? So it's not to say that party boy paul might want more than he can afford, right? He could want more, but he can't afford more. So at this point we're just discussing what he can afford and what he can afford is everything inside that green including the line itself is also affordable. Cool. Alright, so that's about it for the budget constraint. Let's go ahead and move on to the next video

The Amazing Andy spends all of his $1,200 income on magic tricks. If card tricks cost $50 and wand tricks cost $300, which of the following consumption bundles lies upon Amazing Andy’s budget constraint?

• A. 10 card tricks and 2 wand tricks
• B. 8 card tricks and 3 wand tricks
• C. 24 card tricks and 4 wand tricks
• D. 18 card tricks and 1 wand tricks

now let's see how a change in income can affect the budget constraint. So we can imagine if we make more or less money, it's gonna affect the budget constraint line so far income increases, it's going to shift our budget constraint outward. Okay, and if it decreases it's gonna shift inward and by that I mean closer to the origin or further right outward would be further away from the origin inward would be closer to the origin. Okay, so let's see an example here we're party boy paul from our previous example, he's gonna spend all of his income which is now $24. So it increased previously we had an income of $18 and now we're gonna say that we have 24 instead. Everything else is gonna hold constant vodka still sells for six. Beer still sells for three but he has $24 to spend now. Alright, so the first thing I wanna do real quick is I'm gonna go go ahead and I'm gonna put our original budget constraint if you remember when he had $18 his budget constraint looks something like this from the previous page three and six. So he had a budget constraint, something like that. Okay, this was when income. So this was income groups Income of $18. Right? So that was the previous budget constraint. Let's see what happens to it now with more income. So we're gonna still have quantity of vodka up here quantity of beer on this access and we already know our maximum quantity formula but I wanted to reiterate it here. So you guys remember our maximum quantity formula, that is going to be our income divided by our price. Right? So let's say what is going to be our maximum quantity of vodka? Well the maximum quantity we're gonna take our income of 24 divided by our price of $6 for vodka. So 24 divided by six. That is going to give us uh $19 in quantity. We could buy four vodkas, right? We could buy four vodkas. How about beer? So beer? We still have $24 but the price is three for beer, so we can buy eight beers, right? With $24. So notice we were able to buy more of each good, right before we can only afford up to three vodkas. Now we can afford up to four. And before we can only afford up to six beers, and now we can afford eight. So let's go ahead and grab this one in blue. I'm gonna grab this one in blue. So we're gonna mark our axes here, we have our four vodkas with zero beer, and we have our eight beers with zero vodka, right? This is a over here. So what happens, we just have to connect these lines right to connect these points and make a new budget constraint and notice what has happened. It has shifted outward, right? It's shifted further from the origin because income increase, right? And that's what we set up here when income increases, it's gonna shift outward, and that's what we see here. This is his new income Of 24. We have this shift outward, and it shifts on both axes, right? We can buy more Vodka and also more beer. We have more availability, more money to buy both products. Cool, Alright, so that's what happens when we have a change in income. Let's go ahead and pause here and move on to the next video.

An increase in income will:

• A. Increase the slope of the budget constraint
• B. Decrease the slope of the budget constraint
• C. Shift the budget constraint inward
• D. Shift the budget constraint outward

So now let's see how the change in the price of a good can affect the budget constraint. So we're gonna see if the price of a good changes. Well then the maximum quantity, the maximum quantity for only that good shifts. Okay, so we're gonna move only that good. The other good is gonna remain unaffected, right? But we can still afford just as much as we could before of the other good. We can just afford a different amount of this. Good. So if the price increases well it's gonna shift downward, right? We're not gonna be able to afford as much, if the price goes up, but if the price goes down, It's gonna shift upward and we'll be able to afford more of that. Good. So let's go to our example again and let's see what happens here. So party boy Paul spends all of his income. $24 on two goods, Vodka and beer. Right, so he's got 20 foreign income. Let me scroll up one. And the price of vodka is still $6. But the price of beer went up to $4 right? It was $3 before. Now, beers are $4. So this is gonna affect his budget constraint. Right? We're still gonna have here vodka on this axis beer, right? This is quantity of vodka, quantity of beer. And let's just so we remember I'm gonna graph our previous budget uh budget constraint when we had a price of $3. Right? So our income was 24 but the price was $3. Well, we were able to afford eight beers in that case, or four vodka. Right? And we had a budget constraint that looked like this, This was our original budget constraint Before this price change. Right? So this was when I'm gonna put one beer beer p. $3. Right? That was when we had that budget line. So now let's see what happens with our new Uh price of $4. So remember we're just gonna do it again. The maximum quantity formula. That's when we take the income divided by the price. That's gonna tell us the most we can afford of one of the goods. So let's start here with Vodka. This isn't gonna change, right? The price didn't change of Vodka. Um The amount of income didn't change. So we're still gonna have the $24 divided by the $6 per vodka. And we can afford for for vodka, Right? But beer, there was a price change, right? So we still have a 20 foreign income. But instead of a $3 price, we gotta divide by four. We're gonna see that we can only afford six beers now. So we can only afford six beers. We can go ahead and graph this right. We've done the hard work already. So we know that the four vodkas would be here and notice that it doesn't change that dot is right on top of the previous dot. But now we can only afford six beers. Right? So we're gonna have this steeper decrease right here. And what does that tell us notice that the slope has changed, right? The slope when we were dealing with an income change, they were parallel. The slope didn't change. But here the slope is now kind of teetering. It's rotating around that point because we can afford less of one product, but not the other product. Okay, So that's how a change in price is going to affect, is where we're gonna see it holding constant on one point and rotating. Of course, if it was vodka that changed price, the beer would be the one holding constant, and then the vodka would be shifting up or down. Alright, so there you go. Let's go ahead and pause here and move on to the next video.

A change in the price of one good will:

• A. Affect the slope of the budget constraint
• B. Not affect the slope of the budget constraint
• C. Shift the budget constraint inward
• D. Shift the budget constraint outward

A consumption bundle inside the budget line

• A. Is unaffordable
• B. Implies a situation where the consumer spends all of his income on both goods
• C. Implies a situation where the consumer purchases only one good
• D. Is affordable and all available income has been spent
• E. Is affordable but has some unspent income

Lil Kiddo just got $10 for his allowance. He has big dreams for that money and plans to buy out the toy store, slapping down the tenner at the cash register. Disillusioned, he decides to buy pogs for $0.50 each and action figures for $2 each. Which consumption bundle is unaffordable to Lil Kiddo?

• A. 0 pogs and 0 action figures
• B. 8 pogs and 3 action figures
• C. 5 pogs and 4 action figures
• D. 10 pogs and 2 action figures

Campin’ Sam buys firewood and ice. When the price of firewood decreases, the maximum number of firewood she can purchase _____________ and the maximum number of ice she can purchase _______________

• A. Increases; increases
• B. Increases; decreases
• C. Decreases; increases
• D. Increases; remains constant
• E. Remains constant; remains constant