Budget Constraint

Budget constraint is a fancy econ term for that feeling you get when it's your turn to pay for a round of drinks...and when the bartender says the amount you owe, you suddenly realize that you'll be eating Ramen noodles until your next paycheck.

Basically, budget constraint is the amount of stuff you can buy with the amount of money you have at your disposal ("stuff" in this case being a broad term that includes both goods and services...a haircut would be "stuff" in this reckoning).

By formalizing this relatively obvious concept, economists can start to think more deeply about consumer spending. For instance, you can change a person's budget constraint in two ways. You can change their income (if they get a raise, now they have more in the budget). Or you can change prices (if the price of stuff...like that haircut...gets cheaper, they can buy more of it, even though they have the same nominal amount of money).

Economists being economists, they like to graph things like budget constraint in mathematical terms, turning that "I just paid what for six tequila shots and a rum and Coke!?" feeling...into cold equations.

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Finance: What is a Budget?43 Views

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Finance a la shmoop what is a budget? that's that thing you throw right out [Woman throws budget out the window]

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the window just before you start doing all your Christmas shopping

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right but generally it's a plan that lets you see where your money will be

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spent if you have a personal budget well you'll be able to decide ahead of time [Personal budget example]

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how much money you'll spend on clothes, food, megaphones to annoy and anger your

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neighbors and you know whatever floats your boat if you own a company well

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you'll probably have much more complicated budget for things like

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advertising and lawyer fees either way the plan helps you make sure that you

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have enough moolah for everything you need and maybe some leftover for stuff

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you want.....Joan wants to control her money so she decides to set up a budget for [Joan setting up a budget on a laptop]

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next month she makes a thousand bucks from her summer job and well here's what

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her budget looks like.....

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Now Joan knows exactly where every penny is gonna go she's not [Joan driving a car]

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gonna be caught off guard by any surprise expenses she's not gonna spend

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$200 on safecracking equipment and then realize she doesn't have enough left [Joan stood beside a vault of gold bars]

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to pay her phone bill although if she does get hit with some unexpected

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expenses well hopefully yeah she can just pawn some of those exotic vases she

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took from the Peterson place [Joan holding a vase]

Find other enlightening terms in Shmoop Finance Genius Bar(f)