Q.What is a budget line? Write its equation and explain how it shifts when

The price (budget) line shows all combinations of two goods a consumer can just afford with his given income at the given prices.

Explanation

The price line or budget line is a straight line that shows the various combinations of two goods which a consumer can purchase by spending his entire money income at the ruling prices of the two goods. Its slope depends on the ratio of the prices of the two goods, and a change in income shifts the line, while a change in a price changes its slope. The consumer reaches equilibrium where the budget line is tangent to the highest attainable indifference curve.

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The price line or budget line represents all combinations of two goods a consumer can purchase with a fixed income at given prices. It slopes downward, and its slope equals the ratio of the two prices. Consumer equilibrium occurs where the budget line touches the highest possible indifference curve.

Meaning

In the ordinal (indifference-curve) analysis, while an indifference curve shows what the consumer is willing to buy, the price line or budget line shows what the consumer is able to buy. It is also called the budget constraint.

The price line is a straight line showing all the different combinations of two goods, say X and Y, that a consumer can purchase with a given money income, given the prices of the two goods, when the entire income is spent.

Features

• It is a downward-sloping straight line, because to buy more of one good the consumer must buy less of the other.
• Its slope is equal to the ratio of the prices of the two goods, that is, price of X divided by price of Y.
• A change in income shifts the whole budget line parallel to itself (outward if income rises, inward if it falls).
• A change in the price of one good changes the slope of the line by rotating it.

Use in consumer equilibrium

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