A budget line, also known as a budget constraint, is a graphical representation of all possible combinations of goods and services that a consumer can purchase given their current income and prices
. It is used in economics to analyze consumer behavior and decision-making under budget constraints. The budget line has the following key features:
- Downward Sloping : The budget line is a downward-sloping straight line that represents all possible combinations of goods and services that a consumer can afford
. This is because the consumer's income is limited, and they cannot afford to purchase all the goods and services they want.
- Price Ratio : The slope of the budget line represents the relative price of the good on the x-axis in terms of the good on the y-axis
. This price ratio is also known as the opportunity cost, which is the cost of forgoing one good to consume more of another good.
- Feasible Combinations : The budget line shows all the feasible combinations of goods and services that a consumer can purchase with their given income
. It is used to determine the consumer's equilibrium and to analyze how changes in income or prices affect their consumption choices.
The equation for a budget line can be represented as follows: M=Px×Qx+Py×QyM=P_x\times Q_x+P_y\times Q_yM=Px×Qx+Py×Qy Where:
- M is the consumer's income
- PxP_xPx is the price of good x
- QxQ_xQx is the quantity of good x
- PyP_yPy is the price of good y
- QyQ_yQy is the quantity of good y
For example, if a consumer has an income of $20 and wants to spend it on two goods, X and Y, which are each priced at $10, they have three options:
- Buy 2 units of X
- Buy 2 units of Y
- Buy 1 unit of X and 1 unit of Y
These options are represented by the points on the budget line, which is a downward-sloping straight line
