- Calculate the opportunity costs of an action
It makes intuitive sense that Charlie can buy only a limited number of bus tickets and burgers with a limited budget. Also, the more burgers he buys, the fewer bus tickets he can buy. With a simple example like this, it isn’t too hard to determine what he can do with his very small budget, but when budgets and constraints are more complex, equations can be used to demonstrate budget constraints and opportunity cost.
Very simply, when Charlie is spending his full budget on burgers and tickets, his budget is equal to the total amount that he spends on burgers plus the total amount that he spends on bus tickets. For example, if Charlie buys four bus tickets and four burgers with his $10 budget (point B on the graph below), the equation would be
You can see this on the graph of Charlie’s budget constraint, Figure 1, below.
If we want to answer the question, “how many burgers and bus tickets can Charlie buy?” then we need to use the budget constraint equation.
Let’s look at this in action and see it on a graph. What if we change the price of the burger to $1? We will keep the price of bus tickets at 50 cents.
Figure 3 (Interactive Graph). A Changing Budget Constraint.
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