Budget constraint

In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference map as tools to examine the parameters of consumer choices . Both concepts have a ready graphical representation in the two-good case. The consumer can only purchase as much as their income will allow, hence they are constrained by their budget. The equation of a budget constraint is where is the price of good X, and is the price of good Y, and m is income. The concept of soft budget constraints is commonly applied to economies in transition. This theory was originally proposed by János Kornai in 1979. It was used to explain the "economic behavior in socialist economies marked by shortage”. In the socialist transition economy there are soft budget constraint on firms because of subsidies, credit and price support. This theory implies that the survival of a firm depends on financial assistance, especially in a socialist country. The soft budget constraint syndrome usually occurs in the paternalistic role of the State in economic organizations, such as public and private companies and non-profit organizations. János Kornai also highlighted that there are five dimensions to evaluate the post-socialist transition, including fiscal subsidy, soft taxation, soft bank credit (non-performing loans), soft trade credit (the accumulate rears between firms) and wage arrears. According to the point of view by Cllower [1965], budget constraints are a rational planning assumption with two main attributes. The first is that budget constraints refer to the decision makers' behavioural characteristics --- selling output or acquiring asset income to compensate for spending. This means that adjustment limitation on financial resources are obvious. The second is to impose constraints on prior variables, such as constraints on current actual demand based on expectations of future financial conditions.