Consumers’ ability to spend is limited by their income.
Budget constraint is a concept of what is known as consumer theory in economics, which shows how a consumer’s ability to spend is limited by their income or budget. For example, if a consumer has only $100 US dollars (USD) to spend and wants to buy some wine at the price of $10 dollars per bottle, then he or she can only buy 10 bottles. As an economic tool, a budget constraint can be plotted on a graph and is typically demonstrated using an example of a consumer with a specific budget devoted to purchasing two products at certain prices. This example will show the many possible combinations of the two products that the consumer can buy within their budget.
Budget constraints can limit a person’s superfluous spending.
Essentially, the budget constraint concept demonstrates the relationship between revenue and purchasing power. To demonstrate this relationship, economists typically use a basic example of a consumer who has a specific amount of money and a choice between two goods, such as good A and good B. The consumer can, however, choose to buy a combination of the good A and good B according to your particular preferences and needs. Any combination is more or less achievable as long as it stays within the budget. In practice, consumers buy more than just two goods, however, using two goods in the example simplifies things.
Someone who has a limited budget is more likely to engage in price comparison before deciding on an item.
To illustrate, consider a consumer who has a budget of $1000 a week to spend on good A and good B. Good A costs $5 and good B costs $20. At the extremes, the consumer can choose to spend all of his money on good A, which means he can buy 200 units of good A per week. If he bought only good B, he would buy 50 units a week.
On a graph, good A and good B can be plotted on the Y axis and X axis, respectively. The Y axis is the vertical line and the X axis is the horizontal line on the graph. Using the example above, one point might be marked on the Y axis at 200, denoted as point A, and another point might be marked on the X axis at 50, denoted as point B. So what is called the budget constraint slope can be drawn diagonally from point A to B, and will visually show all possible combinations of good A and good B limited by the budget of $1,000 USD. The slope shows the maximum number of goods and services that can be purchased with a specific budget and prices.
In the graph, the slope of the budget constraint is calculated using the following formula: “increase over time”. In other words, the “increase”, which is the change in the value of Y, is divided by the change in the value of X, also known as the “race”. In the example above, the change in Y would be 200 and the change in X would be 50, so the slope would be 200/50, which is equal to 4.
There is also what is called an intertemporal budget constraint, which is the limit of possible spending over a long period of time, depending on the resources available in that period. That is, the intertemporal budget cap is equal to all the income a consumer earns or expects to earn during his lifetime, including any other assets he may have. This concept is also based on the fact that consumers make choices about how to spend their money, and one of its goals is to help them make the most of their resources, whether now or in the future.
Theoretically, an intertemporal budget constraint can help all types of consumers choose between spending money now or at a later date in the future. For example, with this theory, they can do some calculations and find that they can put off current consumption and invest their money. This approach can make them richer in the future, for example, and thus increase their spending capacity, which means they can eventually earn more by increasing their money before spending it.