Intermediate Economics Ch.

2 Budget Constraint
Budget constraint p1x1 + p2x2 <or= m. requires that the amount of money spent
on the two goods be no more than the total amount the consumer has to spend.
Consumption bundle a list of two numbers that tells us how much the consumer is
choosing to consume of each good (x1, x2)
Budget set the income of the consumer, m.
Affordable consumption bundle prices of the two goods where the total cost is
below the budget set of the consumer.
Composite good everything else that the consumer might want to consume other
than good 1, and is measured in dollars to be spent on goods other than good 1.
Budget line set of bundles that cost exactly m
Changes in budget line:
-

Increasing income (parallel shift outward of budget line)

Increasing price (budget line becomes steeper)

Numeraire price the price relative to which we are measuring the other price and
income
Quantity tax the consumer has to pay a certain amount to the gov for each unit of
good purchased
Value/ad valorem tax tax on the price of a good, rather than the quantity
purchased (sales tax)
Quantity subsidy government gives an amount to the consumer that depends on
the amount of the good purchased
Value/ad valorem subsidy government gives money back based on the price of the
good being subsidized
Lump sum tax government takes away some fixed amount of money
Lump sum subsidy government gives a fixed amount of money
Rationing constraints level of consumption of some good is fized to be no larger
than some amount.