Explain how individuals are constrained by their income and the prices they face

1. Income Constraint: Income constraint refers to the limit that an individual's income places on their ability to purchase goods and services. It essentially defines the boundary of what they can afford. If someone has a low income, they're limited in what they can buy compared to someone with a higher income.

2. Prices they Face: Prices play a crucial role in determining what individuals can afford. When prices are high, individuals can afford fewer goods and services with their income compared to when prices are low.

   • Relative Prices: Different goods and services have different prices. Relative prices refer to the comparison of prices between different goods and services. For example, if the price of apples increases, individuals may opt for oranges instead if they become relatively cheaper.

   • Substitution Effect: When the price of a good increases, individuals may switch to cheaper alternatives if available. This is known as the substitution effect. For instance, if the price of beef rises, consumers may start buying more chicken instead.

   • Income Effect: Changes in prices can also affect individuals' purchasing power. If the price of a good decreases, individuals effectively have more "real income" because they can buy more with the same amount of money. Conversely, if prices rise, their real income decreases.

In summary, individuals are constrained by their income because it limits what they can afford, and they are influenced by the prices they face because prices determine the relative affordability of goods and services. This interplay between income and prices ultimately shapes individuals' consumption choices and behaviors in the economy.