[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

play such an important role in making decisions, this chapter begins by reviewing
how they are defined. We then ask how the opportunity set changes when income
and prices change, and how these changes affect the choices that consumers make.
THE BUDGET CONSTRAINT
The individual’s opportunity set is defined by the budget constraint. If, after taxes,
a person’s weekly paycheck comes to $300 and he has no other income, that sum is
his budget constraint. Total expenditures on food, clothing, rent, entertainment,
travel, and all other categories cannot exceed $300 per week. (For now we ignore the
possibilities that individuals may borrow money, or save money, or change their
budget constraints by working longer or shorter hours.)
The line BC in Figure 5.1A shows a simplified individual budget constraint. A
student, Fran, has a total of $300 each month to spend on “fun” items. Figure 5.1
assumes that there are two goods, candy bars and compact discs. This simplification
enables us to highlight the main points of the analysis.
Let’s say that a candy bar costs $1, while a compact disc costs $15. If Fran spent
all her income on candy bars, she could purchase 300 candy bars (point B on the
budget constraint). If she spent all her income on CDs, she could buy 20 CDs (point
C on the budget constraint). Fran can also choose any of the intermediate choices
on line BC. For example, she could buy 10 CDs (for $150) and 150 candy bars (for
$150), or 15 CDs ($225) and 75 candy bars ($75). Each combination of purchases
along the budget constraint totals $300.
CANDY BARS
300
240
180
150
120
60
B
– Slope = 15
candy bars
per CD
Opportunity
set
G
(Gary’s choice)
A F (Fran’s choice)
Budget
constraint
C
0 2 4 6 8 9 11 14 16 18 20
COMPACT DISCS
A
165
150
135
Rise
––––
Run
“rise”
=
0 9 10
A
B
135 – 150
––––––––––
11 – 10 = – 15
“run”
F
11 12
Budget
constraint
(–slope = 15)
Figure 5.1
AN INDIVIDUAL’S BUDGET
CONSTRAINT
Panel A is a budget constraint that shows the combinations of compact discs (at $15)
and candy bars (at $1) that an individual could buy with $300. Fran chooses point F, with
a relatively large number of CDs; Gary chooses point G, with a relatively large number of
candy bars. Panel B shows that the trade-off of moving from 10 CDs to 11 (point A to F)
is 15 candy bars.
102 ∂ CHAPTER 5 THE CONSUMPTION DECISION