Budget Constraints depict the scarcity amount someone would experience when he wants to spend. A consumer would feel constrained if he wished to spend more than the income he generates. It is generally shown as a graph or a table. Let us consider an example to explain it in a better manner. Let us consider the graph given below:
Figure1. Depiction of Budget Constraint
Let us consider the budget for a random family with a single parent. Along the X axis, we have considered that the income of the person for an hour to be £4.95. The spending of the family is shown in the Y-axis. All the measurements are made in the unit of pounds. They are all taken in weeks.
If there are no benefits that are considered and also taxes are excluded, then the line would be a straight one at an angle of 45 degrees, indicating the fact that an extra income of even one pound allows the family to spend one pound more. But this is not the way life runs. It is much more complicated.
- It is clearly indicated in the graph that the family would have around £120 when the net income is actually zero.
- Same is the case when the earning per week would be £70.
- It would be something near £125 when the earnings would be £5.
- And it is important to note that after £70, there is a sharp downward trend which says that in the case of a slight increase in income there would be nothing for the family.
- There is a sudden increase when the income increases a little further after the sharp decline.
- In the rest of the curve, there are a few smoother areas and then increases.
These graphs may make us feel that they may be wrong.But they are right. This is the way things actually run. Budget constraint comes into play to find out the maximum amount that can be affordable for nay good by the consumer. This is done by the graphical representation. In the above case, we saw the relation between two goods.
One is the consumption (net income on the y-axis) and the other is the leisure (negatively measured along the x-axis, one extra hour work denoted one hour lesser in the leisure time). The slope here indicates the relation between the consumption and leisure. The tax system would make it an entirely different slope. This way the budget constraints can be well evaluated.