# Chapter 3 The Behavior of Consumers - WSC

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```					 The budget constraint

goods and they must pay prices.
These features limit what the
consumer can have.

1
Budget constraint or budget line

 The budget constraint for an individual
shows combinations of x and y that can be
attained given a certain income and assuming
prices must be paid for the goods.
 The constraint will be a line in a graph where
the amount of x is measured horizontally and
the amount of y is measured vertically.

2
Budget constraint or budget line
If I = the consumer income in dollars
Px = the price per unit of x
Py = the price per unit of y
x = the amount of x the consumer buys
y = the amount of y the consumer buys,
then the amount the consumer buys is

I = (Px)(x) + (Py)(y)   or y = (I)/(Py) - [Px/Py](x)

Note if x = 0, y = I/Py and if

y = 0, x = I/Px and the slope of the line is - (Px)/(Py).

3
Budget constraint

y

(0, I/PY)   -Px/Py This is the slope – a negative
number.

x
(I/Px, 0)

4
Budget constraint
The slope of the budget
y                           line is - Px/Py. Say x = a
bag of chips and y = a can
of pop. If Px = \$1/bag and
Py = .50/can, then
2                            - Px/Py = -(\$1/bag)
(\$.50/can)
1                         = - 2 cans/bag
x
The slope of the budget line indicates that if one bag of
chips is given up, 2 cans of pop can be obtained in the
market. This occurs at every point on the budget line
when prices remain constant in relation to the amount
bought.
5
slope
Note on the previous screen that the slope of the budget line
is telling us about how much good x is valued in the market in
relation to good y.
This implies that the slope of the budget is indicating the
market rate of substitution of good x for good y.
The slope of the budget is the relative price of x.

6
Example
Say a consumer has \$20 bucks to spend and good x costs \$5 per unit
and good y costs \$4 per unit.
The graph of the budget line would be
y

(0, 5)                    The slope is -5/4 = -
1.25. This means that
if 1 x is given up 1.25
y can be obtained.
x
(4, 0)

7
NOTE
Sometimes a question in the book will have something about
showing me a graph. Instead of having you draw the graph
electronically you can just tell me about both intercepts and the
slope of the line. That way you do not have to draw the graph.

Of course if you are in a face to face class you can turn in graphs.

8

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