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HomeEconomicsWhat is a Budget Line| Definition, Properties, Equation

What is a Budget Line| Definition, Properties, Equation

The budget line can define as a,

graphical representation of all possible combinations of two commodities that can be purchased with given income and prices, with the cost of each combination equal to the consumer’s money income.

You must have knowledge of the concept of the budget line to understand the theory of consumer equilibrium. When the budget line touches the indifference curve, that point gives the maximum utility. The touchpoint point is the customer equilibrium point.

What is the budget line formula?

Px X Qx + Py X Qy = M

  • PX – Price of commodity X
  • PY – Price of commodity Y
  • QX – Quantity of commodity X
  • QY – Quantity of commodity Y
  • M – Consumer income

The above equation indicates that a consumer’s expenditure on X and Y products cannot exceed his or her income (M).

The budget line can use to represent this income constraint.

budget line
Budget line: Px X Qx + Py X Qy = M

Properties of budget line

  • Budget line is a straight line.
  • Budget line has a negative slope.
  • The slope of the budget line is negative of the price ratio.
  • Budget line is tangent to indifference curve.

Assumptions of a budget line

  • It is expected that the consumer would spend all of his money on only two goods.
  • The consumer’s income is limited and known, even if it is entirely dedicated to the purchase of only two items.
  • The consumer is aware of the market pricing of both commodities.
  • We suppose the customer spends all of his or her money.

Budget line questions and answers

Let’s discuss budget line questions and answers.

Why is budget line a straight line?

The slope of this line equals the ratio of these commodities’ prices. The slope of the budget line is also constant since the prices of the two goods are constant. As a result, the budget line is a simple straight line.

Why is the budget line downward sloping?

Budget line is a downward sloping line because the consumer must consume less of something else to consume more of one good.

Most of the Good-X can be purchased when Good-Y is purchased in small quantities.

What is the slope of budget line equal to?

The slope of the line is equal to the ‘Price Ratio’ of two goods. The price ratio expresses the relation between the prices of two items, X and Y, that are inversely related to one another. It’s constant throughout a budget line.

Price Ratio = Px/Py

What happens to budget line if income increases?

When a consumer’s income rises, he or she may purchase more of both commodities, showing a budget line shift to the right. (outward) When income falls, however, the consumer’s consumption capacity falls, and the budget line shifts inwards.

What is the difference between the Budget set and the Budget line?

Budget line is a line that shows the different combinations of two goods that a consumer can attain given his income and market price of the goods. Budget set is a set of goods that the customer can purchase.

Difference between indifference curve and budget line

An indifference curve is a curve that shows the different combinations of two goods that yield the same level of satisfaction, whereas a budget line is a combination of two goods that is possible for consumption at a fixed level of income.

What do you mean by budget constraints?

The budget constraint refers to all potential combinations of commodities that one can purchase in terms of the price of the products, when all revenue is spent.

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