Budget Line: Meaning, Definition, Example

 ·     Budget Line (Price Line)

Suppose the consumer is consuming two goods Q₁ and Q₂. Difference levels obtained from different combination of these two goods can be known from the indifference map of consumer. The indifference map tested and preferences of the consumer. But which particular combination of Q₁ and Q₂ will he consume? To determine it we have to know the prices of two goods and the money income of the consumer. If the prices of the two goods and money income of the consumer are given, we can get the budget line of the consumer. A budget (Price) line is the locus of those commodity combinations which can be purchased with the given money income and given prices. The combination on a given budget line are equally to the consumer. So, with the given income and prices of the commodity, the consumer can purchase any combination lying on the budget line. Let us explain how we can obtain the budget line of the consumer.

               Suppose the money income of the consumer is M. The consumer is spending this money income on two commodities Q₁ and Q_2.  Suppose price per unit of Q₁ is P₁ and price per unit of Q₂ is P₂. These prices are fixed. Let Q₁ and Q₂ be the quantities of Q₁ and Q₂ respectively. So, expenditure on Q₁ is P₁q₁ and expenditure on Q₂ is p₂q_2. We assume that the consumer is spending his entity money income on these two goods. So M = P₁q₁ + p₂q_2. This is the equally of the budget line. It can be re-written as, p₂q₂ = - P₁q₁+ M.

           Or, Q₂ = -P₁/P₂+ M/P₂ . This is an equation of a straight line.

 Shift of the Budget Line

        While deriving the consumer’s budget line, we assume that money income of the consumer and the prices of the commodities are given. If any of these factors changes, the budget line will shift its position. Now suppose that the price of B falls while the price of L  and money income remain the same.

 

 

·