of Mathematics in Principles of Economics.

WORK IT OUT

Understanding Budget Constraints
Budget constraints are easy to understand if you apply a little math. The appendix The Use of Mathematics in

Principles of Economics explains all the math you are likely to need in this book. Therefore, if math is not your

strength, you might want to take a look at the appendix.

Step 1: The equation for any budget constraint is:

where P and Q are the price and quantity of items purchased (which we assume here to be two items) and

Budget is the amount of income one has to spend.

Step 2. Apply the budget constraint equation to the scenario. In Alphonso’s case, this works out to be:

Step 3. Using a little algebra, we can turn this into the familiar equation of a line:

For Alphonso, this is:

Step 4. Simplify the equation. Begin by multiplying both sides of the equation by 2:

Step 5. Subtract one bus ticket from both sides:

Divide each side by 4 to yield the answer:
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