Budget Constraint
What is Budget Constraint?
A budget constraint shows all combinations of goods a consumer can afford given their income and the prices of the goods.
It is drawn as a downward-sloping line whose slope equals the negative ratio of the two goods' prices. Points on the line spend all income; points inside are affordable but leave income unspent. A change in income shifts the line, while a price change rotates it.
Budget Constraint: a worked example
A student has $60 a week for burritos at $6 and coffees at $3. Spending everything on burritos buys 60 ÷ 6 = 10 burritos, the horizontal intercept. Spending it all on coffee buys 60 ÷ 3 = 20 coffees, the vertical intercept. The slope is the negative price ratio, minus $6 ÷ $3 = minus 2, meaning each burrito given up buys 2 coffees. Test a bundle: 4 burritos and 12 coffees costs (4 × $6) + (12 × $3) = $24 + $36 = $60, so it sits on the line. The bundle of 5 burritos and 8 coffees costs $30 + $24 = $54, which lies inside the line with $6 left unspent. If coffee rises to $4, the coffee intercept falls to 60 ÷ 4 = 15 while the burrito intercept stays at 10, so the line pivots instead of shifting.
The mistake students make with budget constraint
A single price increase makes students slide the whole line inward, because it feels as though the consumer got poorer across the board. Only the intercept for the good whose price changed can move. The other intercept is untouched, so the line pivots around it and the slope changes. Parallel shifts come from income changes or from all prices moving by the same proportion. Watch direction too: a higher price for one good pulls that intercept toward the origin, while a higher income pushes both intercepts outward.
Budget Constraint questions
What does the slope of a budget constraint represent?
The slope equals the negative ratio of the two prices and shows the market rate of exchange between the goods. If the good on the horizontal axis costs three times as much as the good on the vertical axis, the slope is minus 3, meaning one more unit of the horizontal good forces the consumer to give up three units of the vertical good. That trade off is the opportunity cost of a unit, and prices set it rather than preferences.
What happens to the budget line when income doubles?
Both intercepts double and the line shifts outward parallel to the original. Prices set the slope, and prices did not change, so the new line has exactly the same steepness. Every bundle affordable before is still affordable, plus a wider set beyond the old line. A drop in income does the reverse, pulling the line inward without tilting it, and a proportional change in both prices produces that same parallel movement.
How is a budget constraint different from a production possibilities curve?
A budget constraint limits one consumer through income and prices, while a production possibilities curve limits a whole economy through its resources and technology. The budget line is straight because the price per unit does not change with how much is purchased. The production possibilities curve usually bows outward, because resources are not equally suited to both goods and opportunity cost rises as output of one good expands. Both draw the border between attainable and unattainable combinations.
Formula / Example
Related terms
Common comparisons
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