Sometimes known as an opportunity set, a budget set is a collection or bundle of goods that can be purchased, allowing for any restraints that have to do with the prices of the goods in the bundle and the total amount that the individual or business can afford to pay for the goods. The idea behind the opportunity set is to identify the bundle of goods that allows the consumer to enjoy the most benefit while still staying within a budget line.
In order to arrive at the best configuration for a budget set, it is important to look closely at two specific issues. One key factor is the income level of the consumer. This will help set the broad parameters for how much can actually be spent in order to acquire the goods that the consumer is considering. To further refine the process, an opportunity set aids in allocating the available income, making it possible to determine the maximum amount that can be spent on the goods while still continuing to actively manage other obligations. Typically, the budget set is always a little below the budget line, but never over the total amount allocated for that line item.
One easy way to understand a budget set is to consider a household that is purchasing new appliances for the kitchen. The household has a specific maximum amount that can be allocated for this purpose, and must find a way to structure the purchase of multiple appliances so that the greatest degree of benefit is achieved. Defining the opportunity set will mean prioritizing the selection of appliances and then evaluating different collections or bundles to determine which one will yield the greatest degree of satisfaction.
For example, one budget set may include a refrigerator, an electric oven with a range, a dishwasher, and a microwave oven. Allowing for the limits imposed by income and the budget, the household may have to forego some features such as an icemaker or go with a smaller oven in order to remain below the budget line. If the household decides that a smaller oven and going with a refrigerator is not acceptable, the alternative may be to go with a budget set that does not include the dishwasher. Ultimately, the decision of what is in the budget set will depend on both the total cost and how that relates to the amount budgeted for the project, with some allowance for the personal preferences of the consumer.
One of the greatest benefits of the budget set is that this process helps to minimize the chances for spending the available funds for items that are not necessary or that will not provide an equitable level of satisfaction. At the same time, this approach to spending also helps to increase the potential of remaining within the budget. This provides the opportunity to maintain financial stability and allow the consumer to manage future purchases with an equal level of proficiency.
