Individuals’ Economizing Problem

What is 'Income'Income is money that an individual or business receives in exchange for providing a good or service or through investing capital.Most people age 65 and under receive the majority of their income from a salary or wages earned from a job.Investments, pensions and Social Security are primary sources of income for retirees.

The income of all people different. Despite this we all have a finite amount of income, even the wealthiest among us.So we must decide how to spend our money.

Limited income

Average monthly disposable salaryCountry Amount

1. Bermuda 4,234.68 $2. Switzerland 3,566.28 $3. United Arab Emirates 3,246.18 $4. Norway 3,196.30 $5. Qatar 3,093.22 $6. United States 2,887.13 $7. Singapore 2,883.18 $8. Luxembourg 2,781.20 $9. Australia 2,779.53 $10. Hong Kong 2,677.01 $……………………………….. ……………………………………. ……………………………………

Unlimited wants

Needs are material items people need for survival, such as food, clothing, housing, and water. Until the Industrial Revolution, the vast majority of the world's population struggled for access to basic human needs. Wants are then the psychological desires that are not essential for life but that make life just a little more enjoyable.

Because we have only limited income (usually through our work) but seemingly infinite wants, itis in our interests to economize: to choose

goods and services that maximize our satisfaction.

Budget line

A budget line or price line represents the various combinations of two goods which can be purchased with a given money income and assumed prices of goods.

Example of buying coffee or biscuits.

• A consumer has weekly income of $60. He purchases only two goods, packets of biscuits and packets of coffee. The price of each packet of biscuits is $6  and the price of each packet of coffee is $12.

Question practice:If consumer spends all his income on biscuits how many biscuits does he buy?

$60 / $6 = 10 biscuitsIf consumer spends all his income on coffee how many coffee jar does he buy?

$60 / $12 = 5 jars

Market Basket Packets of Biscuits Per Week Packets of Coffee Per WeekA 10 0B 8 1C 6 2D 4 3E 2 4F 0 5

Income $60 Per Week = Packets of Biscuits Costs $6 = Packets of Coffee is Priced $12 Each

The various alternative market baskets (combinations of goods) are shown in the table below:

(i) Market basket A in the table above shows that if the whole amounts of $60 is spent on the purchase of biscuits, then the consumer buys 10 packets of biscuits at a price of $6 each and nothing is left to purchase coffee. (ii) Market basket F shows the other extreme. If the consumer spends the entire amount of $60 on the purchase of coffee, a maximum of 5 packets of coffee can be purchased with it at a price of $12 each with nothing left over for the purchase of biscuits. (iii) The intermediate market baskets B to E shows the mixes of packets of biscuits and packets of coffee that the cost a total of $60. For example, in combination of market basket C, the consumer can purchase 6 packets of biscuits and 2 packets of coffee with a total cost of $60.

Diagram/Figure:

Shifts in Budget Line:

• The budget line is determined by the income of the consumer and the prices of goods in the market. If there is a change in the income of the consumer or in the prices of goods, the budget line shifts in response to a exchange in these two factors.

• 1) Income changes: When there is change in the income of the consumer, the prices of goods remaining the same, the price line shifts from the original position. It shifts upward or to the right hand side in a parallel position with the rise in income.

• A fall in the level of income, product prices remaining unchanged, the price line shifts left side from the original position. With a higher income, the consumer can purchase more of both goods than before but the cost of one good in terms of the other remains the same.

• 2) Price changes. Now let us consider that there is a change in the price of one good. The income of the consumer and price of other good is held constant. When there is a fall in the price of one good say commodity A, the consumer purchases more of that good than before. A price change causes the budget line to rotate about point L

That’s all.Thank for your attention.