2.1 How Individuals Make Choices Based on Their Budget Constraint

Consider the typical consumer’s budget problem. Consumers have a limited amount of income to spend on the things they need and want. Suppose Alphonso has \(\$10\) in spending money each week that he can allocate between bus tickets for getting to work and the burgers that he eats for lunch. Burgers cost \(\$2\) each, and bus tickets are \(50\) cents each. Figure \(\PageIndex{1}\) shows Alphonso’s budget constraint, that is, the outer boundary of his opportunity set. The opportunity set identifies all the opportunities for spending within his budget. The budget constraint indicates all the combinations of burgers and bus tickets Alphonso can afford when he exhausts his budget, given the prices of the two goods. (There are actually many different kinds of budget constraints. You will learn more about them in the chapter on Consumer Choices.)