Posted by Anjali Kaur on Jul 02, 2020

# What does the budget line show?

The way we have a budget in our family to look after the household expenditure, in the same way, we use a budget line to show our income levels beyond that we can not spend. Today, we will learn about the budget line and the concepts related to it. Let’s learn.

## What is Budget line?

A budget line shows all the possible combinations of consumption bundle that a consumer can afford given the prices of both commodity and income of the consumer.

or

The budget line shows a set of commodities of two goods that can be purchased if full income is spent on them.

## Why do we assume only two commodities in economics?

We choose two commodities, to create a better understanding of a concept and it is easier to represent two commodities on XY-coordinates; two-dimensional.

## What is budget line equation?

P1X +P2Y = M

P1; Price of X commodity

X; Units or quantity of X commodity

P2; Price of Y commodity

Y; Units or quantity of Y commodity

M; Money income or income.

If you combine P1X, it shows total expenditure on X and P2Y, shows total expenditure on Y.

## What are the intercepts in a budget line?

A budget contains two intercepts namely; Horizontal intercept which is on the X-axis and Vertical intercept which is on the Y-axis.

Any intercept on budget line shows the full income spending on that good, For example, Horizontal intercept is on X axis; It indicates full income spend on X commodity and the units that can be bought of X commodity. Similarly, vertical intercept is on Y axis, it indicates full income spend on Y commodity and the units that can be bought of Y commodity.

Horizontal Intercept; X= M/P1

Vertical Intercept; Y=M/P2

## What is the slope of the budget line?

The slope of the budget line is the ratio of the prices of the commodities.

Slope= -p1/p2

## Graphical representation of a budget line

Suppose a consumer has a budget of \$20 to be spent on two commodities bread and buns, if the price of bread is \$4 and the price of buns is \$2 each. Then the consumer can determine various consumption bundles that they can afford. let’s see how?

Price of Bread, X= P1 = \$4

Price of Buns, Y = P2 =\$2

Income =M= \$20

Now, by hit and trial method and by assuming values for X and Y, we can determine different combinations of a commodity that a consumer can buy. The budget equation after placing the values of price and income becomes:

4X+2Y = 20 equation (1)

Now, assume X is 0 and put this value in the above equation, Y becomes 10. Similarly, we can find all the values for Y, that will fall under the budget of the consumer (\$20).

The following is the graphical representation of the above (X, Y) points, after joining these points, we will get the negatively sloped budget line.

Remember, on the X-axis, we represent the number of X commodities, and on the Y-axis, we represent the number of Y commodities.

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Photo by Tierra Mallorca on Unsplash