Budget Constraint
A budget constraint is a line or plane that limits possible consumer choices.
Contents
Bivariate
A budget contraint in terms of two goods, x and y, is usually characterized as a line. The line is defined by the equality xPx + yPy = m; wherein
i is the quantity of good i itself
Pi is the price of good i
m is the available income that can be spent
The intercepts of this line are m/Px and m/Py (on the x- and y-axes respectively).
The slope of this line is -Px/Py. This is generally referred to as the marginal rate of transformation (MRT).
Multivariate
A budget constraint is defined by the equality of some income constant m to the dot product of the price and quantity vectors p and q. (Recall that the dot product of two vectors like [x y] and [Px Py] is xPx + yPy.)