What is a budget constraint?

A budget constraint represents all the combinations of goods and services that a consumer can afford given their income and the prices of those goods and services. It illustrates the trade-offs a consumer faces when deciding how to allocate their limited resources, effectively showing what is possible within their financial limits.

The budget constraint is typically depicted graphically in a two-dimensional space where each axis represents one of the goods or services the consumer is considering. The area under the budget line indicates the combinations of the two goods that the consumer can purchase without exceeding their budget, while points above the line represent combinations that are unaffordable.

By understanding the budget constraint, consumers can make informed decisions about their spending, prioritizing various goods and services based on their preferences and the constraints of their financial situation.