A Budget Line (budget constraints)

The budget line is an important component when analysing consumer behaviour. The budget line illustrates all the possible combinations of two goods that can be purchased at given prices and for a given consumer budget.The amount of a good that a person can buy will depend upon his income and the price of the good he is purchasing.

Now suppose an individual has a total income of Rs 12 and he has to spend his income on 2 commodities A and B. Price of A and B are Rs 1.50 and Rs. 1 respectively.

Units of A

Units of B

Total expenditure

Price = 1.50 Rs

Price = 1 Rs

( in Rupees)

8

0

12

6

3

12

4

6

12

2

9

12

0

12

12


And the above table can be portrayed in the form of graph like


· With a limited income of 12 Rs, The individual can buy either of the given combinations of two commodities A and B.

· Any Point within the triangle is attainable by the consumer.

· Any point outside the triangle can not be bought by the consumer with his limited income.

At U,we have 7 units of A + 3 units of B; it would total cost 13.50 Rs.. So, this is unattainable

So, we got to know that With a limited budget the consumer can only consume a limited combination of A and B (the maximum combinations are on the actual budget line). Consumer can buy more products with the increase in his income or decrease in the prices.


1 comment:

Thipmanee Xayasena said...

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