Budget constraint line. Government budget constraint Budget constraint formula

Definition 1

Budget is a plan for the collection and distribution of all state resources by certain economic agents within a given period of time.

The budget has many forms, but almost every citizen of our country acts within the budget. The budget can be either state, local, tax, etc., or personal, that is, each consumer has one or another budget. Depending on the size of the budget, the choice of goods on the part of consumers is distributed, that is, whether he can afford this product (financially) or not. All this leads to the definition of the budget constraint.

Definition 2

So, budget restrictions are restrictions that are financial in nature, expressed in the form of a limit on spending funds from the budget.

Types of Budget Constraints

Restrictions (limit) on budget transactions may be as follows:

• limit on any strategic indicators of the enterprise (government institution, state as a whole, etc.);
• limit in relation to the main components of the financial budget of an organization (government institution, state as a whole, etc.), this group includes:
• limit(s) within fixed costs;
• a limit within the framework of financing these fixed costs, that is, restrictions on payments;
• the limit on the enterprise’s resources (on its assets), precisely those that, one way or another, lead to the emergence of a group of fixed costs;
• limit on special indicators that are related to financial economic indicators activities of the enterprise, for example, when calculating and drawing up central federal budgets, budgets for investment activity or functional budgets.

The essence of budget restrictions (limits)

Financial restrictions (limits) allow an enterprise to more effectively manage its financial and economic activities and obtain the necessary economic results based on the results of this activity. Also, the policy of cost limits increases the level of control over the organization’s work in various areas of activity.

Example 1

For example, it is possible to introduce restrictions in the organization on marginal profit and profitability within the product produced or for customers, retail outlets.

Limitations on company assets

Why and why we need limits on an organization’s assets. One of the most important groups of indicators economic activity companies are strategic indicators, where return on assets comes first. This indicator must be constantly monitored and monitored its dynamics, and along with it, the organization’s return on equity capital.

This is due to the fact that the organization’s own capital, the more it is invested in the company, the correspondingly greater the company’s assets, and, therefore, such a company should bring more profit and this profit should cost more.

From all of the above, it follows that if there are restrictions on assets in the company, then this has a positive effect on business, since there is control over effective use these assets and equity as a consequence. Also, such a policy of restrictions will improve the liquidity indicators of the enterprise, because many companies have problems with financing their current activities; the funds spent are usually more than expected or actually required. This happens also because cash“frozen” in asset inventories.

Note 1

Thus, budget constraints are simply necessary for successful operation modern enterprises, they allow you to establish a successful and more efficient business.

The consumer purchases a lot of different goods and services. Each person has his own preferences that reflect his needs. However, the consumer's behavior and his choices depend not only on his desires, but also on how he can satisfy his desires based on his income and the prices of the relevant goods.

Budget restrictions stand in the way of desires. Budget constraints indicate that total consumption must be equal to income. If a consumer spends all of his income on goods X and Y (does not borrow or save), then the budget constraint looks like this:

or Income = Expense, where J- income; R x– price of product X; R u– price of product Y; Q is the quantity of goods consumed.

Let's assume that only $5 per week is allocated for the purchase of fruits (which we consider only oranges and apples). The price of apples is 1 dollar per 1 piece, oranges are 0.5 dollars per 1 piece. In table Figure 6.3 shows the various combinations of oranges and apples that can be purchased on a budget of $5 per week.

Table 6.3 – Available market sets
(Income – $5 per week, R x – $1, R y – $0.5)

If all 5 dollars were spent on apples, the largest number of apples that could be purchased in a week at P = 1 dollar would be 5 pieces. This is represented by set B 1 (5 apples, 0 oranges). The other extreme is set B6, where the entire budget is spent on oranges. Their maximum quantity is 10 pieces at a price of 0.5 dollars. All combinations of apples and oranges are shown in Fig. 6.5. The resulting line is called the budget line and represents the budget constraint.

The quantity of good Y obtained by giving up a unit of good X is represented by the slope of the budget line. This can be seen in Fig. 6.5. Each time a consumer gives up a unit of good X (DQ x = 1), he receives 2 units of Y (DQ = 2). The slope of the budget line is

which in this case is 2. This means that the consumer must give up 2 oranges to get an additional apples at current prices for these goods. Note that

If we multiply the slope of the budget line by -1, we get the ratio of the prices of X and Y. In general: the slope of the budget line

Rice. 6.5 – Budget constraint

Changes in income and prices will cause the budget line to shift. A change in income causes a parallel shift in the budget line (graph A, Fig. 6.6).

A change in the price of good X rotates the budget line around its intersection point with the Y axis to a new intersection point with the X axis (graph B, Fig. 6.6).

A change in price Y rotates the budget line to a new intersection point with the Y axis, without changing its intersection point with the X axis (graph C, Fig. 6.6).

Rice. 6.6 – Changes in income and prices

A change in price causes a consumer response in the form of a substitution effect and an income effect.

14. Budget constraint and consumption set

Essentially, the theory of consumer behavior is a theory of consumer choice. The most important principles of this choice were formulated in the above model of consumer behavior. Let us dwell on the concept of budget constraint and consumer set.

Budget constraint- this is a restriction when a consumer chooses combinations of goods, determined by the consumer’s income and the prices of goods.

Consumer set is a combination of goods and services available to the consumer under his budget constraint (Table 1).

For example, we have 120 rubles. per week for your personal expenses. Let us assume that with this money we usually buy product 1 and product 2. In this case, product I costs 10 rubles, and product 2 costs 20 rubles. Every time we spend our money, we have to decide what to buy, i.e. make consumer choice. Even with such a limited range of goods, we have several options on how to spend our 120 rubles. Let's name four options.

Table 1

By choosing combination A, we buy only product 1 (12 pcs.), and by choosing combination D, we buy only product 2 (6 pcs.). Consumer bundles B and C include not only product 1, but also product 2 (respectively, product 1 (8 pcs.) and product 2 (2 pcs.), product 1 (4 pcs.) and product 2 (4 pcs.)). Each time our choice is limited by the prices of goods and our income (total expenses). In general, the budget constraint means that all expenses on purchased goods are equal to the consumer’s income.

The budget constraint can be represented on a graph as a direct budget constraint. On the graph, consumption bundles are represented on a line that slopes from top left to bottom right (negative slope). The horizontal axis indicates product 2, and the vertical axis indicates product 1 (Fig. 6).

Fig. 6. Budget constraint line

Budget Constraint Line shows all the maximum possible combinations of goods available to the consumer.

The budget constraint line can be compared to the production possibilities curve.

By analogy, it could be called the “consumer possibilities curve.”

The consumer here also chooses from the maximum possible set of goods. By increasing purchases of some good, he must give up some amount of another good, because his resources (income) are limited. Not purchasing a certain amount of another good represents an opportunity cost for the consumer. For example, if we prefer consumption bundle B to bundle A, then our opportunity cost purchases of one product 2 will be equal to two goods 1.

(Materials are based on: E.A. Tatarnikov, N.A. Bogatyreva, O.Yu. Butova. Microeconomics. Answers to exam questions: Tutorial for universities. - M.: Publishing house "Exam", 2005. ISBN 5-472-00856-5)

Analyzing consumer behavior, it can be argued that the decision to purchase goods and services is made not only on the basis of the usefulness of a particular product, but also on an assessment of the financial capabilities of the subject and prices on the market. Prices are determined as a result of the relationship between supply and demand and do not depend on the decisions of an individual entity.

Because of this, the concept of “ budget constraint “It refers to the amount of money that the subject has and which he can use to purchase economic goods. The budget constraint can also be interpreted as various maximum combinations of economic goods that a subject can purchase with the full expenditure of its budget and existing prices.

To simplify the analysis, we assume that the subject spends his budget on the purchase of two goods. Therefore, the budget constraint has the form:

.

Quantity of good X, obtained by giving up a unit of good Y, is determined by the slope of the budget line for a given income and prices. The slope of the budget constraint is determined by the price ratio. (Fig.4.9).

Let's transform the budget constraint to represent it graphically:

.

Then the coordinates of the intersection of the budget constraint curve with the axes X And Y(the points of intersection with the axes show the amount of corresponding goods that can be purchased if the entire budget is allocated to the purchase of only this good) will have the following coordinates, respectively:

product Y = , product X = .

Fig.4.9 Budget constraint

The budget constraint line may be more complex (broken, convex, etc.), which depends on the conditions that determine the consumer’s ability to buy these goods. An example of such situations could be the rationing of some consumed products, the provision of some benefits for free or on preferential terms.

Fig. 4.10 Changes in prices for goods and budget constraints

The budget constraint may change under the influence of two circumstances:

a) change in income. All other things being equal, the budget constraint curve shifts in parallel.

b) changes in prices for goods. In this case, the real purchasing power of available income changes, which is reflected through a change in the slope of the curve. The cheaper the good, the flatter the budget constraint graph becomes and vice versa (Fig. 4.10).

4.4 Consumer equilibrium

It is assumed that each subject strives to spend his entire budget in such a way as to achieve maximum welfare, and if he achieves this welfare, then we can talk about consumer equilibrium . This is an equilibrium in the sense that under the given premises of the model, the consumer receives a set of goods that brings him the maximum possible satisfaction when spending all his income and he has no reason to exchange it for another.

Graphically, the consumer's equilibrium looks like the point of tangency between the indifference curve and the budget constraint (Fig. 4.11). Any point on the graph located above the budget constraint (point WITH), is unattainable for the subject, that is, he cannot acquire a given amount of goods with his income and prices for goods. Any point below the budget constraint (point A), indicates that the entity did not spend its entire budget. Dot IN, lying at the intersection of the budget constraint and the indifference curve, indicates the irrational use of money when purchasing goods, since the maximum possible satisfaction of needs is not achieved.

Rice. 4.11 Consumer equilibrium

Mathematically, the maximum satisfaction of consumer needs when purchasing and consuming several goods is described by the equality of relations marginal utility goods to the prices of these goods (Gossen's second law).

.

Consumer equilibrium is achieved if the subject buys such a quantity of goods that the ratio of marginal utility to price will be the same for each purchased good and at the same time the subject spends his entire budget, that is, the condition is met:

,

.

A situation in which a buyer refuses to purchase one product is called angular equilibrium (4.12). It arises in cases where, at the existing price level, the marginal utility of a unit of goods is less than the marginal cost of acquiring it, or one of the goods is an anti-good for a given subject.

Rice. 4.12 Angular equilibrium

If the budget constraint looks like a broken line, then the subject reaches maximum well-being at one of the break points (Fig. 4.13).

As we noted, consumer choice is subject to a number of restrictions:

a) tastes that rank products for the consumer;

b) the size of the budget he has;

c) the price level of purchased goods.

That's why the consumer's equilibrium may change under the influence of three circumstances:

Rice. 4.13 Equilibrium with a broken curve budget constraint

1) changing consumer tastes . In this case, the nature of the indifference curve changes (the new one can intersect the old curve), as a result of which the combination of purchased goods changes with constant income and prices for these goods (Fig. 4.14). The subject feels more satisfied (for example, a change in the ratio between the purchase of cigarettes and the services of fitness centers under the influence of a person’s desire for a healthy lifestyle).

Rice. 4.14 Changing tastes and consumer equilibrium

2) Change in income . If the income and purchasing power of a subject increases, then the budget constraint curve shifts upward and this allows the subject to move to a new higher indifference curve, that is, he buys more goods. If we connect the equilibrium points, we get income-consumption curve which shows how the consumption of various goods will change with the growth of the subject’s income (Fig. 4.15).

Fig. 4.15 Income-consumption curve

If both goods are normal, then an increase in income will lead to an increase in consumption of both goods. If an increase in income leads to the fact that one of the goods for the subject becomes of poor quality, then the income-consumption curve will begin to tilt towards the normal good.

Rice. 4.16 Engel curve

Based on the income-consumption curve, one can construct Engel curve , which shows how much of a specific good is consumed as the subject’s income grows (Fig. 4.16) and Törnqvist curves, showing the change in the structure of family budget expenditures as income grows. The slope of the Engel curve is given by the relation
, Where
change in income.

Ernst Engel's research revealed the following patterns :

a) at given prices for all goods, the share of family income spent on food tends to decrease as income increases;

b) expenses for services related to education, health care, and recreation are growing faster than income is growing.

These patterns are also confirmed by materials from Russia and Belarus (Table 4.2): the higher the income, the lower the share of expenses on food and the higher the share of expenses on non-food products.

Table 4.2

Structure of household expenditures depending on income level

3) Changes in prices for goods and services leads to a change in the real purchasing power of available income. In this case, the slope of the budget constraint changes on the graph, which allows you to move to a new indifference curve and achieve higher satisfaction of your needs. If we connect the equilibrium points, we get a price-consumption curve, which is actually the demand curve for a given product (Fig. 4.17).

Fig. 4.17 Impact of price changes on consumer equilibrium

For different types of relationships between goods in consumption, the price-consumption curve will have a different shape. If goods are substitutes for each other in consumption (a trip by bus or trolleybus), then the price-consumption curve will have a negative slope. If the goods are complementary to each other in consumption (bread and butter), then the price-consumption curve will have a positive slope. If two goods are independent of each other in consumption (clothing and furniture), then the price-consumption curve will be horizontal.

Demand function - this is the marginal utility of a good determined in the process of consumer choice, expressed in a monetary scale corresponding to the optimal composition of the purchase. In the consumer choice model, the consumer's individual demand is influenced by:

Consumer preferences;

The consumer's income allocated for the purchase of this good is

The price of a given good;

Prices of goods that replace and complement a given good in consumption.

A change in the price of one good affects the consumption of other goods, as the substitution effect and the income effect operate. A decrease in the price of one good will lead to a decrease in the consumption of another good, since the subject believes that it is better to increase the consumption of a good that has become cheaper for him ( substitution effect ). Income effect lies in the fact that a decrease in the price of one good makes it possible to increase the purchase and consumption of not only this, but also another good as a result of an increase in the subject’s real income

In 1915, the Russian economist E. Slutsky considered the influence of the income effect and the substitution effect in relation to the product whose price is decreasing. In the 30s, the same idea was considered by D. Hicks and in economic theory, despite some differences in analysis, there is Slutsky-Hicks theorem .

A change in the price of good X leads to an increase in consumption of the good from X 0 to X 1 (Fig. 4.18). It is necessary to understand what part of the growth in consumption of good X is caused by the refusal to consume good Y (the substitution effect) and what part is generated by the increase in the purchasing power of income (the income effect).

Fig. 4.18 Graphic interpretation of the Slutsky-Hicks theorem

To decompose the total effect X 0 X 1 into the substitution effect and the income effect, we assume that the real income of the consumer, despite the change in prices, has not changed. This means that the subject remains on the previous indifference curve, because The level of consumer satisfaction does not change. Let's draw an imaginary budget line M ’ parallel to the budget line M 1 tangent to the indifference curve U 0 . It reflects the new ratio of prices for goods X and Y while maintaining the level of real income. Therefore, X 0 X' is the increase in the volume of consumption of good X as a result of the effect of replacing the consumption of good Y with a cheaper good X. Then X"X is the increase in consumption of good X as a result of an increase in consumer income resulting from the transition from the budget constraint M ' to the budget constraint M 1 at a constant price level.

Consideration of the income effect and the substitution effect showed that if the good is normal, then the effects of both income and substitution act in the same direction.

Fig. 4.19 Change in the volume of consumption of a low-quality good

If the product is of poor quality, then the income effect and the substitution effect act in different directions (Fig. 4.19). This is due to the fact that a decrease in the price of a low-quality good causes an increase in the consumption of this good, but at the same time the subject spends part of his income on the purchase of good Y, which is normal, and due to this there is a reduction in the purchase of a low-quality good. But in general, the consumption of a low-quality good increases, since the substitution effect exceeds the income effect in absolute value.

Fig.4.20 Giffen product

Low-quality goods are distinguished Giffen Goods, which is characterized by an increase in consumption of a given good with an increase in its price. This means that the income effect works in the opposite direction and exceeds the substitution effect (Figure 4.20).

It is believed that Giffen goods should not only be low-quality goods for the subject, but also occupy a significant place in the subject's budget (food costs for low-income families).

The exchange that the consumer makes brings him benefit. The buyer exchanges money for a certain product because he values ​​the utility of this product higher than the utility of the money he gives for a given quantity of the product. The seller exchanges goods for money because he believes that this amount of money has greater utility for him than the quantity of goods sold. Using this approach, it was formulated Smith's theorem , according to which exchange on the market benefits both parties.

Consideration of consumer behavior led to the emergence of the concept "consumer surplus" , which refers to the benefit and satisfaction that the subject receives when purchasing this product “for free” (Fig. 4.21). The first to introduce this concept into scientific circulation was the French scientist J. Dupuis in 1844.

Fig.4.21 Consumer surplus

Consumer surplus arises due to the fact that the total utility in acquiring a good exceeds the amount of money that the subject pays for a given quantity of goods. This occurs because the buyer pays the same price for all units of the good purchased, and the price is equal to the marginal utility of the last unit of a given good purchased, while the marginal utilities of the first units of the good purchased are higher than the price. Consumer surplus is equal to the amount of money the buyer would save if, instead of paying the same price for each unit of the good he purchased, he paid according to the marginal utility of each unit of the good. As a result of such a transaction, the total utility received by the subject from consuming the entire quantity of the purchased good is greater than the amount of money paid for this good. Therefore, consumer surplus is measured as the difference between the price that a consumer is willing to pay for a good and the price that he actually pays. On this occasion, A. Marshall noted: “The excess price that the consumer would be willing to pay rather than do without of this subject, over and above the price he actually pays, serves as an economic measure of his additional satisfaction. This excess may be called consumer rent."

What is a budget constraint?

Definition 1

Budget constraint is one of the approaches to consumer behavior; this approach implies consumer choice among available goods, limited by the income of consumers and the price of selected goods.

Thus, above the budget constraint, the consumer cannot purchase goods.

The budget constraint is represented graphically and numerically using a formula. The graphical method is used more often for the most understandable visual representation of the direct budget constraint (and involves choosing from two groups of goods), but the numerical formula can be modified to calculate the budget constraint for several groups of goods, depending on the volume and purchase price.

The budget constraint is presented in graphical form in Figure 1.

It is clear from the graph that the relationship between two goods 1 and 2 is being considered, between which the consumer makes a choice according to a certain structure (in the graph, the consumer, limited by the budget line, can purchase 12 units of goods No. 1 and 6 units of goods No. 2 for his entire budget).

The straight line A-D on the graph is the budget constraint, above which the consumer, while maintaining prices for goods and income, cannot purchase goods.

Basic properties of the consumer's budget constraint

The budget constraint has the following main features:

• always negative slope of the straight line of the budget constraint;
• the angle of inclination of the line depends on the ratio of two types of goods (the consumer’s choice in favor of one or another product);
• shift the straight line upward when income increases and downward when income decreases;
• a downward shift of the straight line with a significant increase in prices for goods, a downward shift of the straight line with a significant decrease in prices for goods (the “income effect” appears; the consumer has more funds to purchase goods);
• consumers can switch from cheaper goods to more expensive ones quality goods(the “replacement effect” appears);
• The cost of one unit of goods is measured in the cost of another unit of goods.

Example 1

The consumer's total income is measured at 20 units and the prices of good No. 1 are set at 5 units, good No. 2 at 10 units. A consumer can use his entire income to purchase 4 units of product No. 1 or 2 units of product No. 2. But if the consumer wants to purchase 2 units of product No. 1, then product No. 2 can only be purchased in the amount of one unit, since the total income is only 20 units.

What factors influence the budget constraint?

Based on the essence of the budget constraint, the consumer’s budget constraint is influenced by two main factors:

1. product price;
2. consumer income.

Also distinguished among the factors are consumer preferences, which consist of the perception of usefulness of a certain product compared to another product.

Thus, the consumer's budget constraint is further influenced by the consumer's subjective opinion about the usefulness of the product.

Example 2

An example of the manifestation of this factor is as follows: let’s say one person prefers to choose sweets, and another prefers healthy foods; or someone will prefer a more well-known product, despite its properties, and someone will choose a more practical product. This is how consumer preferences manifest themselves in the constraint curve.

All of the above elements together form consumer choice, which is reflected in the direct budget constraint.

In general, consumer demand is formed under the influence of these three factors. At the same time, the consumer always prefers to extract the greatest benefit from a limited budget.