Budget Line: It is the representation of combination of commodities that a consumer may opt for with his given money income. It is also know as Price Line.
Here it is assumed that the consumer has a money income of Rs.5.The price of one unit of commodity is Rs.1.
In first case the consumer buys 5 units of A & 0 units of B likewise 4 units of A & 1 units of B so on so forth until 0 units of A & 5 units to B.
Commodity A Commodity B
5 0
4 1
3 2
2 3
1 4
0 5
Joining these points (as seen below) will result in a straight line called as Budget Line or Price Line (PL).It is popularly known as 'Price Line'.
Interesting Discussion: In the fig. below PL is the original Price Line (the dark line).
PL1 is the price line formed after the price of commodity B has increased (indicating we will get lesser units of B with in the same level of money income).
PL2 indicates the price of both the commodities have decreased (consumer is getting more of both the commodities) hence the Price Line shifts rightwards forming a new one.
PL3 indicates price of both the commodities have increased (hence you are getting lesser units).
PL4 indicates price of ONLY commodity B has increased & PL5 indicates price of commodity B has decreased (we are getting more units with the same level of money income).
Kindly pay special attention to the two point H & K in the fig above. They have been placed, intentionally. The point Kindicate unattainability i.e.., it is beyond the purchasing power of consumer.
Point H indicates consumer's under-spending i.e.., though consumer can afford dearer commodity he is not buying it.
Now a very important question arises,where would the consumer attain maximum satisfaction in choosing the combination of commodities with his given money income. In order to answer this question we would need to bring the Indifference Curve (IC) in our discussion. Kindly refer to the previous post 'Micro Economics: Concept Of Utility' for concept of IC.
The point where Price Line is tangent to the IC will result in Consumer's Equilibrium. Refer to the figure below.
Therefor, the consumer will attain maximum level of satisfaction where the slope of Price Line touches the IC.
Quick Notes:
Commodity A Commodity B
5 0
4 1
3 2
2 3
1 4
0 5
Joining these points (as seen below) will result in a straight line called as Budget Line or Price Line (PL).It is popularly known as 'Price Line'.
 |
| Price Line or Budget Line |
Interesting Discussion: In the fig. below PL is the original Price Line (the dark line).
 |
| Price Line Scenario's |
PL1 is the price line formed after the price of commodity B has increased (indicating we will get lesser units of B with in the same level of money income).
PL2 indicates the price of both the commodities have decreased (consumer is getting more of both the commodities) hence the Price Line shifts rightwards forming a new one.
PL3 indicates price of both the commodities have increased (hence you are getting lesser units).
PL4 indicates price of ONLY commodity B has increased & PL5 indicates price of commodity B has decreased (we are getting more units with the same level of money income).
Kindly pay special attention to the two point H & K in the fig above. They have been placed, intentionally. The point Kindicate unattainability i.e.., it is beyond the purchasing power of consumer.
Point H indicates consumer's under-spending i.e.., though consumer can afford dearer commodity he is not buying it.
Now a very important question arises,where would the consumer attain maximum satisfaction in choosing the combination of commodities with his given money income. In order to answer this question we would need to bring the Indifference Curve (IC) in our discussion. Kindly refer to the previous post 'Micro Economics: Concept Of Utility' for concept of IC.
The point where Price Line is tangent to the IC will result in Consumer's Equilibrium. Refer to the figure below.
 |
| Consumer Equilibrium |
Therefor, the consumer will attain maximum level of satisfaction where the slope of Price Line touches the IC.
Quick Notes:
Remember there can be a shift in equilibrium due to Income Effect (consumer's income changes), Substitution Effect (presence of substitution goods in the market) & Price Effect (price of commodity changes).
