Chapter Two
Budget Constraint
Where are We in the Course?
 We are working on the 1st of the 3 components of microeconomics: Consumer behavior, production theory,  and market.

There are three elements of consumer behavior:  budget constraint, preference, and choices.
Consumption Choice Sets
A consumption choice set is the collection of all consumption choices available to the consumer.
What constrains consumption choice?
Budgetary, time and other resource limitations.
Budget Constraints
Q: When is a bundle (x1, … , xn) affordable at prices p1, … , pn?
A: When          p1x1 + … + pnxn £ mwhere m is the consumer’s (disposable) income.
Budget Constraints
The consumer’s budget set is the set of all affordable bundles;B(p1, … , pn, m) ={ (x1, … , xn) | x1 ³ 0, … , xn ³ 0 and                       p1x1 + … + pnxn £ m }
The budget constraint is the upper boundary of the budget set.
Budget Set and Constraint for Two Commodities
Budget Set and Constraint for Two Commodities
Budget Constraints
If n = 3 what do the budget constraint and the budget set look like?