What is Budget Line?
The Budget Line, which is also known as Budget Constraint, exhibits all the combinations of two commodities that a customer can manage to afford at the provided market prices and within the particular earning degree.
The budget line is a graphical delineation of all feasible combinations of two commodities that can be bought with provided income and cost so that the price of each of these combinations is equivalent to the monetary earnings of the customer.
It is important to keep in mind that the slope of the budget line is equivalent to the ratio of the cost of two commodities. The slope of the budget constraint possesses distinctive importance.
In other words, a budget line slope can be described as a straight line that bends downwards and includes all the potential combinations of two commodities which a customer can purchase at market value by assigning his/her entire salary. The budget line concept is different from the Indifference curve, though both are necessary for consumer equilibrium.
The two basic elements of a budget line are:
- The consumer’s purchasing power (his/her income)
- The market value of both products
Equation of Budget Line
To understand the budget line concept in a detailed manner, it is important to understand the below-mentioned equation. Budget line equation can be represented as follows:
M = Px × Qx + Py × Qy
Px is the cost of product X
Qx is the quantity of product X
Py is the cost of product Y
Qy is the quantity of product Y
M is the consumer’s income
Additional Reading: What is Government Budget?
Budget Line Example
Radha has ₹ 50 to buy a biscuit. She has few options to allocate her income so that she receives maximum utility from a limited salary.
(@ Rs. 10 per packet)
(@ Rs. 5 per packet)
|A||0||10||10×0 + 5×10=50|
|B||1||8||10×1 + 5×8=50|
|C||2||6||10×2 + 5×6=50|
|D||3||4||10×3 + 5×4=50|
|E||4||2||10×4 + 5×2=50|
To get an appropriate budget line, the above budget schedule can be outlined on a graph.
The budget set indicates that combinations of the two commodities are placed within the affordability margin of a consumer.
Also Read: What is Budget Set?
Features of Budget Line
Some of the properties of the budget line are.
- Negative Slope – If the line is downward is shows a reverse correlation between the two products
- Straight Line – It indicates a continuous market rate of exchange in individual combination
- Real Income Line – It denotes the income and the spending size of a customer
- Tangent to Indifference Curve – It is the point when the indifference curve meets the budget line. This point is called the consumer’s equilibrium
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Assumptions of a Budget Line
The budget line is mostly based on the assumption and not reality. However, to get clear and precise results and summary, the economist considers the following points in terms of a budget line:
- Two Commodities – The economist assumes that the customers spend their income to purchase only two products
- Income of the Customers – The buyer’s income is limited, and it’s designated to buy only two products
- Market Price – The cost of each commodity is known to the customer
- Expense is similar to Income – It is assumed that the customer spends and consumes the whole income.
Quick link: Foreign Trade during Colonial Rule
A shift in Budget Line
A budget line includes a consumer’s earnings and the rate of a commodity and these are the two important factors that shift the budget line.
- Shift due to Change in Price: The product amount either increases or decreases from time to time. For instance, if the price and income of product A remain constant and the price of product B decreases, then the buying potential of product B will automatically increase. Similarly, if the price of B increases and other factors remain steady, the demand for product B automatically decreases.
- Shift due to Change in Income: Change in income makes a huge difference which leads to a change in the budget line. High income means high purchasing possibility and low income means low purchasing potential, making the budget line to shift.