Budget Line

Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer.

1. BUDGET LINE By Manas Dhibar

2. BUDGET LINE Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices , such that the cost of each of these combinations is equal to the money income of the consumer. It is also known as price line.

3. Schedule Of Budget Line Combination Of Apple and Bananas Apple ( A ) ( $ 4 Each ) Bananas ( B ) ( $ 2 Each ) Money Spent = Income ( $ ) E 5 (5×4)+(0×2)=20 F 4 2 (4×4)+(2×2)=20 G 3 4 (3×4)+(4×2)=20 H 2 6 (2×4)+(6×2)=20 I 1 8 (1×4)+(8×2)=20 J 10 (0×2)+(10×2)=20

4. Algebraic Expression of Budget Line M = ( Pa × Qa ) +( Pb + Qb ) Where, M = Money income Qa = Quantity of Apples (A) Qb = Quantity of Banana (B) Pa = Price of each Apple Pb = Price of each Banana Apples ( A ) B J I H G F E X Y A C Unattainable combination D Income is under spent Bananas ( B) 1 2 3 5 6 4 2 6 8 10

5. Properties Of Budget Line Budget Line Is Downward Sloping:- Budget line has a negative slope I.e. it slopes downwards as more of one good can be bought by decreasing some units of other good Budget Line Is Straight Line :- The slope of budget line is represented by the price ratio. As price ratio is constant throughout , the budget line is a straight line.

6. SHIFT IN BUDGET LINE Effect of a change in the income of the consumer : - Upward Shift :- Budget line shifts to the right from AB to A¹B¹ due to increase in income. Downward Shift :- Budget line shifts to the left from AB to A²B² due to decrease in income . X Y B¹ B A A² BANANA (B ) APPLE (A) A¹ B²

7. Effect of change in the relative prices ( Apples and Banana ) :- 1) Change in the prices of commodity on X- axis( Apples ) :- Budget line shifts from AB to A¹B due to decrease in price of Apples. Budget line shifts from AB to A²B due to increase in price of Apples. Y X B A A² A¹ BANANA (B ) APPLE (A )

8. 2) Change in the price of commodity on Y- axis ( Bananas ):- Budget line shifts from AB to AB¹ due to decrease in price of Bananas . Budget line shifts from AB to AB ² due to increase in price of Bananas . Y X B B² A BANANA ( B ) APPLE ( A ) B¹

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