Q.Define price line or budget line and explain shifts in budget line.
You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
Start your 14-day free trial to unlock the full solution →The budget line (price line) shows all affordable combinations of two goods that use up the consumer's entire income at current prices; it is written M = Px.X + Py.Y with slope Px/Py. A change in income shifts it parallel to itself, while a change in the price of a single good makes it pivot (rotate) about the intercept on the unchanged good's axis.
Meaning of the budget line / price line
In the ordinal theory of consumer behaviour a consumer tries to buy the best combination of two goods, say X and Y, that his limited income allows. The budget line (also called the price line or price-income line) is the straight line that joins all the combinations of the two goods the consumer can buy if he spends his whole money income at the ruling prices.
If money income is M, the price of X is Px and the price of Y is Py, the budget line is given by:
M = (Px multiplied by X) + (Py multiplied by Y)
- The point where the line meets the X-axis = M / Px (maximum units of X if all income is spent on X).
- The point where it meets the Y-axis = M / Py (maximum units of Y if all income is spent on Y).
- The slope of the budget line = Px / Py, the rate at which the market lets the consumer exchange Y for X.
Combinations on the line are just affordable; combinations inside the line (towards the origin) are affordable with income left over; combinations beyond the line are unaffordable.
Shifts in the budget line
- Change in income (prices constant): If income rises, the consumer can buy more of both goods, so the line shifts outward (to the right) parallel to the original line. If income falls, it shifts inward (to the left) parallel to the original. The slope Px/Py is unchanged because prices are unchanged. …
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.