82 PART • Producers, Consumers, and Competitive Markets Satisfaction with life 5000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 GDP per capita in 1996 U.S $ F IGURE 3.9 INCOME AND HAPPINESS A cross-country comparison shows that individuals living in countries with higher GDP per capita are on average happier than those living in countries with lower per-capita GDP 3.2 Budget Constraints • budget constraints Constraints that consumers face as a result of limited incomes So far, we have focused only on the first element of consumer theory—consumer preferences We have seen how indifference curves (or, alternatively, utility functions) can be used to describe how consumers value various baskets of goods Now we turn to the second element of consumer theory: the budget constraints that consumers face as a result of their limited incomes The Budget Line • budget line All combinations of goods for which the total amount of money spent is equal to income To see how a budget constraint limits a consumer’s choices, let’s consider a situation in which a woman has a fixed amount of income, I, that can be spent on food and clothing Let F be the amount of food purchased and C be the amount of clothing We will denote the prices of the two goods PF and PC In that case, PFF (i.e., price of food times the quantity) is the amount of money spent on food and PCC the amount of money spent on clothing The budget line indicates all combinations of F and C for which the total amount of money spent is equal to income Because we are considering only two goods (and ignoring the possibility of saving), our hypothetical consumer will spend her entire income on food and clothing As a result, the combinations of food and clothing that she can buy will all lie on this line: PF F + PC C = I (3.1)