BUDGET LINE or PRICE LINE

BUDGET LINE or PRICE LINE

What is a budget line in economics? and how does the indifference curve and budget line help to decide to consumer equilibrium.

The understanding of the concept of budget line is essential for knowing the theory of consumer’s equilibrium. 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. For example, a consumer has a weekly income of Rs. 60. He purchases only two goods, packets of biscuits and packets of coffee. The price of each packet of biscuits is Rs. 6 and the price of each packet of coffee is Rs. 12. Given the assumed income and the price, of the two goods, the consumer can purchase various combination of goods or market combination of goods weekly. The various alternative market baskets (combinations of goods) are shown in the table below.

Market basket             Packets of biscuits per         Packets of coffee per

Income Rs. 60 =                Packets of Biscuits          = Packet of coffee is

per week                          costs Rs. 6                  priced Rs. 12 each

(1)     Market basket A in the table above shows that if the whole amount of Rs. 60 is spent on the purchase of biscuits, then the consumer buys 10 packets of biscuits at a price of Rs. six each and nothing is left to purchase coffee.

(2)  Market basket F shows the other extreme. If the consumer spends the entire amount of Rs. 60 on the .purchase of coffee, a maximum of 5 packets of coffee can be purchased with it at a price of Rs. 12 each with nothing left over for the purchase of biscuits.

(3)  The intermediate market baskets B to E show the mixes of packets of biscuits and packets of coffee that cost a total of Rs. 60.0. For example, in combination of market basket C, the consumer can purchase 6 packets of biscuits and 2 packets of coffees with a total cost of Rs. 60.

week                                 week

A                                     10                                      o

B                                                                           8                                       1

C                                     6                                       2 ,

D                                                                           4                                       3

E                                                                           2                                       4

F                                      o                                       5

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