EC211 · LESSON 05 / 08

5. The consumer budget

With 120 baht for food X and drinks Y, first distinguish affordability from what you prefer most.

Understand

What is this lesson explaining?

A bundle specifies quantities of X and Y. The budget set contains all bundles costing no more than income. Its boundary spends the entire budget. Outside bundles are unaffordable; inside bundles leave money unspent.

The X intercept is M/Px because all money is spent on X. The slope −Px/Py tells you how many Y units must be sacrificed for one extra X when the budget is fully spent.

KEY MODEL

PxX + PyY ≤ M

Y = M/Py − (Px/Py)X

MAvailable spending budgetPx, PyUnit prices of X and YBudget setAll affordable bundles

See it on a graph

The graph is right here

Read the axes and original point first. Then change one value at a time and watch the curve or point move.

KEY MODEL

u = √(XY), m = 120, pᵧ = 6, pₓ = 12

A=B=C : X=5, Y=10

B₀B₁u₀Bᶜ

Change X price: 30 baht per X

X price changes → budget pivots at the unchanged Y-intercept → X changes from 5 to 5. Hicks preserves utility: substitution 0 + income 0 = 0. C is hypothetical compensation.

Blue dashed: original · Solid: new state · E₀/A: original point · E₁/B: new point. Coincident points share a label; use the explanation to read each result.

A curve shifts when one of its non-axis conditions changes. An adjusting point on a fixed curve is movement along that curve, not a shift of it.

Quick check

NO TYPING

If M rises to 180 with Px = 30 and Py = 20, what are the new intercepts?

Takeaway

Remember these two ideas

✓

M = 120, Px = 30, Py = 20 gives intercepts of 4 X or 6 Y and slope −1.5.

Common mix-upThe budget line shows affordability; it cannot determine the chosen bundle without preferences.

Assumptions and sources

Two nonnegative goods with constant unit prices and no borrowing in this exercise.

Pindyck & Rubinfeld, Microeconomics, 9th Global Edition, ch. 3, pp. 104, 108 (PDF 106, 110); original examples and questions.