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Difference between budget set and budget constraint? - Commerce PDF Download
What is the difference between budget constraint and budget set?
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A budget set represents those combinations of consumption bundles that are available to the consumer given his/her income level and at the existing market prices. On the other hand, budget constraint implies that the total amount spent on two goods together should be less than or equal to his/her given income level. In other words, budget constraint suggests that a particular consumption bundle is available or affordable to a consumer if the total money spent on both the goods is less than or equal to the total available money income.
For example,
Then, the budget constraint is
FAQs on Difference between budget set and budget constraint? - Commerce
| 1. What is the difference between a budget set and a budget constraint? |  |
Ans. The budget set refers to the set of all possible combinations of goods and services that a consumer can afford to buy with their income and prevailing prices. On the other hand, the budget constraint is a specific combination of goods and services that a consumer can purchase given their income and the prices of goods in the market. The budget constraint represents a specific point on the budget set, indicating the maximum amount of goods that can be bought within the given budget.
| 2. How is a budget set determined? | |
Ans. A budget set is determined by the consumer's income and the prices of goods and services in the market. It is the combination of goods and services that the consumer can afford to buy with their income at the prevailing market prices. The budget set expands as the consumer's income increases or if the prices of goods decrease, allowing for a wider range of possible combinations of goods and services.
| 3. What factors influence the shape of a budget set? | |
Ans. Several factors influence the shape of a budget set. Firstly, the consumer's income level affects the size of the budget set, as higher income allows for a larger set of affordable goods and services. Secondly, the prices of goods and services influence the slope and orientation of the budget set. If the price of one good increases relative to others, the budget set will tilt towards the relatively cheaper goods. Lastly, the consumer's preferences and tastes can also influence the shape of the budget set, as they determine the consumer's willingness to allocate their income towards different goods and services.
| 4. Can a consumer choose any point within the budget set? | |
Ans. Yes, a consumer can choose any point within the budget set, as long as it falls within their budget constraint. Each point within the budget set represents a different combination of goods and services that the consumer can purchase. The consumer's choice within the budget set depends on their preferences, needs, and utility maximization, where they aim to achieve the highest level of satisfaction given their budget constraint.
| 5. How does a change in income or prices affect the budget set? | |
Ans. A change in income or prices directly affects the budget set. An increase in income or a decrease in prices expands the budget set, allowing the consumer to afford a larger quantity of goods and services. Conversely, a decrease in income or an increase in prices shrinks the budget set, limiting the consumer's purchasing power. These changes impact the consumer's decision-making process, as they need to adjust their choices within the new budget set to maximize their utility.
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