In the title - one of the main terms of the theory of consumer behavior. What is a budget line? This is a graph that helps to analyze the possibilities, desires of the consumer. Let's talk in more detail about the concept, properties of an object, as well as related terms and phenomena.
Definition of the word
The budget line (BL) is a straight line, whose points show a set of benefits, for whose acquisition the allocated budget is fully spent. It crosses the coordinate axes U and X at points that indicate the greatest possible number of products that can be purchased for a specific income at current prices.
Thus, the BL shows various combinations of 2 sets of any goods that are bought at a certain profit and fixed cost.
BL properties
Imagine the properties of budget lines.
1. Have only a negative slope. Since the sets of goods located on the BL have the same prices, an increase in the number of acquisitions of one leads to a decrease in purchases of the other. Recall that a curve showing the feedback of two variables always differs in the negative form of the slope.
2. The location of the BL depends on the amount of consumer profit. If his income increases, but prices remain the same, then the budget line will move to the right, parallel to the previous straight line. If profit decreases at constant prices, then the BL goes to the left, but is still parallel to the old line.
Thus, a change in consumer income will not lead to a change in the angle of inclination of the BL. Only the points of its intersection with the coordinate axes X and Y change.
3. The slope coefficient of the BL equals the ratio of the value of economic goods with the opposite sign. Let us explain this property. BL slope coefficient is the ratio of the price of the product measured horizontally to the price of the product measured vertically. Hence the steepness of such a slope: P x / P y (product price X, product price Y).
The minus sign in this case indicates a negative slope of the BL (after all, the prices of products X and Y will always be only positive values). Hence, you need to refrain from buying any item from complex X in order to purchase anything from the set of U.
4. The change in prices of economic goods affects the change in the slope of the BL. Here we observe the following. If the cost of one product changes, then the angle of inclination of the budget line and the location of one of the points of intersection of the BL with the coordinate axis change.
But if prices for both goods become different, then it becomes equivalent to changing the size of the total profit of the consumer. That is, the BL in this case moves to the right or left.
Budget cap
The budget line is intertwined with broader concepts. The first is budget constraint. These are all sets of goods that a consumer can buy at a certain budget and real prices. The law of budgetary constraints: total revenue equals total expenditure. With any change in the amount of profit, the budget line shifts.
Budget constraint can be described by the equation: P x Q x + P y Q y ≤ M. Decipher:
- P x , P y - the price of two goods (X and Y).
- Q x , Q y - a certain amount of goods X and U.
- M is the budget available to the consumer.
- The sign "less than or equal to" means that the total amount of costs cannot be more than a person’s income. Maximum costs may equal total gains.
From here it is clear how the BL crosses the coordinate axes X and Y at two points:
- X 1 = M / P x .
- Y 1 = M / P y .
These points of the budget line show the maximum volume of products X and Y that can be purchased for consumer income at the current prices.
Budget space
The next important related concept is budget space. This is the name of the entire selection zone available to the consumer. On the graphs it appears as a shaded triangle. On the one hand, it is limited by the budget line of the consumer, on the other - the coordinate axes X and Y.
To highlight such a space in the figure, it is enough to construct the line of the budget constraint by the formula: P x Q x + P y Q y = M.
Indifference curve
Indifference curve (indifference curve) - these are various combinations of a pair of economic goods that are equally necessary for a person. Using these graphs, you can show the balance of the consumer - the point of maximizing overall utility, satisfaction from spending your fixed profit.
Indifference curves are widely used tools by the neoclassical school of economics. In particular, they are applicable in studies of microeconomic situations related to the problem of choice.
The properties of indifference curves (KB) are as follows:
- Design bureaus always have a negative slope, since rationally minded consumers prefer more recruitment to less.
- A KB located above and to the right of the other curve is preferable for the consumer.
- Design bricks have a concave shape - it is determined by the marginal decreasing rate of substitution.
- Complexes of benefits on curves that are more distant from the origin are preferable to sets on the x and y axes of the curves closer to zeros.
- KB cannot overlap. They demonstrate marginal decreasing rates of substitution of one product for another.
The KB complex forms a map of many indifference curves. It is used to describe consumer preferences for all types of economic goods.
Indifference curves and budget line
How do these concepts relate to each other? The indifference curve demonstrates what a person would like to buy. And BL is what he can get. Together they answer the question: "How is it possible to provide the greatest satisfaction from a purchase with limited profit?"
Thus, KB and BL are used to graphically represent the situation when a person maximizes the utility acquired by him when buying two goods with a limited budget. From here we can single out the requirements of the optimal complex of consumer goods. There are only two of them:
- Finding a set of benefits on a budget line curve.
- Providing the consumer with the most preferred combination.
Thus, the budget line helps to imagine in what proportions for a fixed budget two different sets of economic benefits can be purchased. This graph is often analyzed along with an indifference curve and other related phenomena.