budget line

1. Budget Line:
The knowledge of the concept of budget line or what is also called budget
constraint is essential for understanding the theory of consumer’s equilibrium.
A higher indifference curve shows a higher level of satisfaction than a lower
one. Therefore,a consumer in his attempt to maximise his satisfaction will try
to reach the highest possible indifference curve.
But in his pursuit of buying more and more goods and thus obtaining more
and more satisfaction he has to work under two constraints: first, he has to pay
the prices for the goods and, secondly, he has a limited money income with
which to purchase the goods. Thus, how far he would go in for his purchases
depends upon the prices of the goods and the money income which he has to
spend on the goods.
In order to explain consumer’s equilibrium there is also the need for
introducing into the indifference curve analysis the budget line which
represents the prices of the goods and consumer’s money income.
Suppose our consumerhas got income of Rs. 50 to spend on two goods X and
Y. Let price of good X in the market be Rs. 10 per unit and that of Y Rs. 5 per
unit. If the consumerspends his whole income of Rs. 50 on good X, he would
buy 5 units of X; if he spends his whole income of Rs. 50 on good Y he would

2. buy 10 units of Y. If a straight line joining 5Xand 10Vis drawn, we will get what
is called the price line or the budget line.
Thus budget line shows all those combinations of two goods which the
consumercan buy by spending his given money income on the two goods at
their given prices. A look at Fig. 8.14 shows that with Rs. 50 and the prices of X
and Y being Rs 10 and Rs. 5 respectively the consumercan buy l0Y and OX, or
Stand IX; or 6Y and 2X, or 4y and 3X etc.
In other words, he can buy any combination that lies on the budget line with
his given money income and given prices of the goods. It shouldbe carefully
noted that any combination of the two goods such as H (5Y and 4X) which lies
above and outside the given budget line will be beyond the reach of the
consumer.
But any combination lying within the budget line such as K (2X and 2Y) will be
well within the reach of the consumer, but if he buys any such combination he
will not be spending all his income of Rs. 50. Thus, with the assumption that
whole of the given income is spent on the given goods and at given prices of
them, the consumerhas to choose from all those combinations which lie on the
budget line.
It is clear from above that budget line graphically shows the budget constraint.
The combinations of commodities lying to the right of the budget line are
unattainable because income of the consumeris not sufficient to buy those
combinations. Given consumer’s income and prices of the two goods, the
combinations of goods lying to the left of the budget line are attainable, that is,
the consumercan buy any one of them.
It is also important to remember that the intercept OB on the Y-axis in Fig.
8.14 equals the amount of his entire income (M) divided by the price (PY ) of
commodity Y. That is, OB = M/PY . Likewise,the intercept OL on the X-axis
measures the total income divided by the price of commodity X. Thus OL =
M/Px.
The budget line can be written algebraically as follows:
Where Px and Py denote prices of goods X and Y respectively and M
stands for money income:
The above budget-line equation (1) implies that, given the money income of the
consumerand prices of the two goods, every combination lying on the budget
line will cost the same amount of money and can therefore be purchased with
the given income. The budget line can be defined as a set of combinations of

3. two commodities that can be purchased if whole of the given income is spent
on them and its slope is equal to the negative of the price ratio.