Budget Line or Price Line

A budget line or price line represents the various combinations of two goods which can be purchased with a given money income and assumed prices of goods.

It is also known as Price Opportunity line or Budget Constraint line. C

Budget line is drawn as a continuous line. It identifies the options from which the consumer can choose the combination of goods. Budget line (BL) or consumption possibility curve or line of attainable combinations is a boundary showing the largest possible combinations of goods that a consumer can buy in a market, given his money income and market prices of the goods.

Budget line Equation:

M=PxQx  + PyQy

M = Money income

Qx = Quantity of commodity X consumed

Qy = Quantity of commodity Y consumed

Px = Price of commodity X

Py = Price of commodity Y

Slope of Budget Line:

The slope of Budget line is the ratio of prices of two commodities and it is symbolically expressed as:

Slope of BL = Px/Py

Characteristics of Budget Line

  1. The shape of the budget line depends on the income of the consumer and the prices of the two goods
  2. It is always a straight line.
  3. It has a negative slope downwards from left to right
  4. The slope of PL is equal to the ratio of the prices of the two goods
  5. The position of price line is determined by the size of income of the consumer & its slope is shaped by the price structure of two commodities.

Changes in Prices

Keeping the income of the consumer constant, when the price of any one good changes and the price of the other good remains the same, the slope of the budget line changes.

    1. If the price of one good rises when the prices of other goods and the budget (income) remain the same, consumption possibilities shrink.
    2. If the price of one good falls when the prices of other goods and the budget (income) remain the same, consumption possibilities expand.

1.  When the price of X changes

If the price of X rises then AB2 will be the price-line while if the price of X falls then AB1 will be the price-line.

2. When the price of Y changes

If the price of Y rises then  B2L will be the price-line while if the price of X falls then B1L will be the price-line.

3. When the price of both commodities change

i) When the price of X falls and price of Y rises (shown above)

ii) When the price of X rises and price of Y falls (shown below)

Change in the Income of the consumer

  • Keeping the prices of two commodities constant, when a consumer’s income increases, consumption possibilities expand.
  • Keeping the prices of two commodities constant, when a consumer’s income decreases, consumption possibilities shrink.
  • A decrease in the income shifts the budget line leftward ( P2L2) while the slope of the budget line doesn’t change because prices have not changed.
  • An increase in the income shifts the budget line rightward ( P1L1) while the slope of the budget line doesn’t change because prices have not change.

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By Hassham

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