BUDGET LINE
DEFINITION:
A budget line is a straight line that slopes downwards and consists of all
the possible combinations of the two goods which a consumer can buy at
a given market price by allocating all his income. It is an entirely
different concept from that of an indifference curve, though they are
both are essential for consumer equilibrium.
The two essential components of a budget line are:
• The purchasing power of a consumer, i.e. his income;
• The market price of both commodities.
EQUATION:
To explain the concept of the budget line in a precise form, the
following equation has been given:
Px * Qx + Py * Qy = M
Equation of Budget Line Where Px is the price of goods X;
Qx is the quantity of goods X;
Py is the price of goods Y;
Qy is the quantity of goods Y;
M is the income of the consumer
, EXAMPLE:
A person has 50/- for buying pens. He has the following options for
allocating his amount such that he derives the maximum utility from
limited income:
The above Budget schedule can be plotted on a graph to obtain the
appropriate budget line for this instance;
Budget Set: Budget set defines all such combinations of the two goods
lying within the affordability limit of a consumer.
DEFINITION:
A budget line is a straight line that slopes downwards and consists of all
the possible combinations of the two goods which a consumer can buy at
a given market price by allocating all his income. It is an entirely
different concept from that of an indifference curve, though they are
both are essential for consumer equilibrium.
The two essential components of a budget line are:
• The purchasing power of a consumer, i.e. his income;
• The market price of both commodities.
EQUATION:
To explain the concept of the budget line in a precise form, the
following equation has been given:
Px * Qx + Py * Qy = M
Equation of Budget Line Where Px is the price of goods X;
Qx is the quantity of goods X;
Py is the price of goods Y;
Qy is the quantity of goods Y;
M is the income of the consumer
, EXAMPLE:
A person has 50/- for buying pens. He has the following options for
allocating his amount such that he derives the maximum utility from
limited income:
The above Budget schedule can be plotted on a graph to obtain the
appropriate budget line for this instance;
Budget Set: Budget set defines all such combinations of the two goods
lying within the affordability limit of a consumer.
