Description
This video explains the very basics of the budget constraint, which is of great importance when dealing with consumption duality. We start by analysing its components, then explain how to draw the budget line and lastly we focus on different factors that can change its shape.
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Consumer behaviour is a maximisation problem. It means making the most of our limited resources to maximise our utility. As consumers are insatiable, and utility functions grow with quantity, the only thing that limits our consumption is our own budget (assuming, of course, we are dealing with normal goods, not negative or harmful goods which consumption we want to limit).
A budget constraint provides the second half of the maximisation problem. We need to balance the utility we derive from consumption with the budget we have. This simply shows that our consumption is capped and that the more we spend on one good, the less we can on the other.
Learn more by reading the dictionary entry.
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