Book contents
- Frontmatter
- Contents
- Preface
- 1 Introduction
- Part I Theory of the Consumer
- 2 Preferences and Utility
- 3 The Budget Constraint and the Consumer's Optimal Choice
- 4 Demand Functions
- 5 Supply Functions for Labor and Savings
- 6 Welfare Economics 1: The One-Person Case
- 7 Welfare Economics 2: The Many-Person Case
- Part II Theory of the Producer
- Part III Partial Equilibrium Analysis: Market Structure
- Part IV General Equilibrium Analysis
- Part V Market Failure
- Index
3 - The Budget Constraint and the Consumer's Optimal Choice
from Part I - Theory of the Consumer
- Frontmatter
- Contents
- Preface
- 1 Introduction
- Part I Theory of the Consumer
- 2 Preferences and Utility
- 3 The Budget Constraint and the Consumer's Optimal Choice
- 4 Demand Functions
- 5 Supply Functions for Labor and Savings
- 6 Welfare Economics 1: The One-Person Case
- 7 Welfare Economics 2: The Many-Person Case
- Part II Theory of the Producer
- Part III Partial Equilibrium Analysis: Market Structure
- Part IV General Equilibrium Analysis
- Part V Market Failure
- Index
Summary
Introduction
In Chapter 2 we described the consumer's preferences and utility function. Now we turn to what constrains him, and what he should do to achieve the best outcome given his constraint. The consumer prefers some bundles to other bundles. He wants to get to the most-preferred bundle, or the highest possible utility level, but he cannot afford everything. He has a budget constraint. The consumer wants to make the best choice possible, the optimal choice, or the utility-maximizing choice, subject to his budget constraint.
In this chapter, we describe the consumer's standard budget constraint. We give some examples of special budget constraints created by nonmarket rationing devices, such as coupon rationing. We also analyze budget constraints involving consumption over time.
After describing various budget constraints, we turn to the consumer's basic economic problem: how to find the best consumption bundle, or how to maximize his utility, subject to the budget constraint. We do this graphically using indifference curves, and we do it analytically with utility functions. In the appendix to this chapter, we describe the Lagrange function method for maximizing a function subject to a constraint.
The Standard Budget Constraint, the Budget Set, and the Budget Line
A consumer cannot spend more money than he has. (We know about credit and will discuss it in a later section of this chapter.) We call what he has his income, written M, for “money.” He wants to spend it on goods 1 and 2. Each has a price, represented by p 1 and p 2, respectively.
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- Information
- Publisher: Cambridge University PressPrint publication year: 2012