What are the properties of budget line?

Properties of budget line

• Budget line is a straight line.
• Budget line has a negative slope.
• The slope of the budget line is negative of the price ratio.
• Budget line is tangent to indifference curve.

What is the importance of budget line?

A budget line shows the combinations of two products that a consumer can afford to buy with a given income – using all of their available budget.

What are the main determinants of budget line?

The determinants of budget line are money income of the consumer, price of good 1 and price of good 2.

What is the formula of budget line?

The budget line equation is ‘P₁x₁ + P₂x₂ = M‘ presuming two goods are x₁and x₂ and prices, P₁ and P₂ respectively. M represents money income.

What are the 2 essential elements of a budget line?

The two essential components of a budget line are:

• The purchasing power of a consumer, i.e. his/her income;
• The market price of both commodities.

What is the other name of budget line?

The Budget line also known as the budget constraint indicates the combination of goods a consumer can purchase given his or her income and the prices in the market.

What is budget line example?

Example of Budget Line



Suppose a consumer has an income of Rs. 50, and it will be used to buy commodities X and Y. To derive maximum utility from the said income, only the following options are available. The required budget line is obtained by plotting the above budget against the following graph.

What is the slope of budget line?

The slope of the budget line is the is the ratio of the prices of good 1 and good 2. This would mean price of good on the x axis divided price of goods on the y axis. The slope of a budget line is always negative as it is downward sloping.

Why budget line is straight line?

Explanation: A straight budget line depicts the constant slope of the budget line. The slope of the budget line given by the ratio of the price of the two goods (- P1/ P2). Constant slope and thereby, straight line is in accordance with the assumption that the prices of the two goods are given.

Why budget line is called a price line?

It is the graphical representations 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.

Why the slope of budget line is negative?

Budget line is a downward sloping line because given the prices of goods X and Y, and income of the consumer, more of Good-X (on X-axis) can be purchased only when less of Good-Y (on Y-axis) is purchased. Was this answer helpful?

What is a budget constraint?

The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. Opportunity cost measures cost in terms of what must be given up in exchange.

What is budget space?

A budget space shows a set of all combinations of the two commodities that can be purchased by spending the whole or a part of the given income. In other words, budget space represents the opportunity set for the consumer, that is, all those combinations of two commodities which he can buy, given his budget constraint.

What is the implication of budget line in a real life situation?

A budget line represents the different combinations of two goods that are affordable and are available to a consumer, while being aware of his/her income-level and market prices of both the goods.

What is the role of budget line in the determination of consumer equilibrium?

The knowledge of the concept of budget line 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.

Why budget line is straight line?

Explanation: A straight budget line depicts the constant slope of the budget line. The slope of the budget line given by the ratio of the price of the two goods (- P1/ P2). Constant slope and thereby, straight line is in accordance with the assumption that the prices of the two goods are given.

Why is budget line called price line?

It is the graphical representations 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.

What is the slope of budget line?

The slope of the budget line is the is the ratio of the prices of good 1 and good 2. This would mean price of good on the x axis divided price of goods on the y axis. The slope of a budget line is always negative as it is downward sloping.

Why is it called indifference curve?

An indifference curve is a curve that represents all the combinations of goods that give the same satisfaction to the consumer. Since all the combinations give the same amount of satisfaction, the consumer prefers them equally. Hence the name indifference curve.