Budget Line: Meaning, Definition, Example

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 theÂ Indifference curve, though both are necessary forÂ consumer equilibrium.
The two basic elements of a budget line are:

• The consumerâ€™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.Â Budget line equation can be represented as follows:
M = PxÂ Ã—Â QxÂ +Â PyÂ Ã—Â Qy
Where,
Px is the cost of product X
Qx is the quantity of productÂ  X
Py is the cost of productÂ  Y
Qy is the quantity of productÂ  Y
M is the consumerâ€™s income

Budget Line Example

Radha has â‚¹ 50 to buy a biscuit. She has few options to allocate her income so that she receives maximum utility from a limited salary.

 Budget Schedule Combination Cream biscuit  (@ Rs. 10 per packet) Plain biscuit  (@ Rs. 5 per packet) Budget Allocation A 0 10 10Ã—0 + 5Ã—10=50 B 1 8 10Ã—1 + 5Ã—8=50 C 2 6 10Ã—2 + 5Ã—6=50 D 3 4 10Ã—3 + 5Ã—4=50 E 4 2 10Ã—4 + 5Ã—2=50 F 5 0 10Ã—5+ 5Ã—0=50

To get an appropriate budget line, the above budget schedule can be outlined on a graph.

The budget set indicatesÂ that combinations of the two commodities are placed within the affordability margin of a consumer.
Also Read:Â What is Budget Set?

Features of Budget Line

Some of the properties of the budget line are.

• Negative SlopeÂ â€“Â  If the line is downward is shows a reverse correlation between the two products
• Straight LineÂ â€“Â  It indicates a continuous market rate of exchange in individual combination
• Real Income LineÂ â€“ It denotes the income and the spending size of a customer
• Tangent to Indifference CurveÂ â€“Â  It is the point when the indifference curve meets the budget line. This point is called the consumerâ€™s equilibrium

You might also want to know:Â Economic system in India

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 CommoditiesÂ â€“ The economist assumes that the customers spend their income to purchase only two products
• Income of the CustomersÂ â€“ The buyerâ€™s income is limited, and itâ€™s designated to buy only two products
• Market PriceÂ â€“ The cost of each commodity is known to the customer
• Expense is similar to IncomeÂ â€“ It is assumed that the customer spends and consumes the whole income.