Budget Line

by Irfanullah Jan

Budget line (also known as budget constraint) is a schedule or a graph line that shows a series of various combinations of two products that can be purchased while income of the consumer and product prices remain constant.

Budget line is like a production possibilities curve which is relevant to producers. It is a useful tool in understanding consumer behavior and choices. As stated above a budget constraint may be either in the form of a schedule/table or a line/curve, the latter being more common.

Budget line depicts the consumer choices between two products. Number of units of one product are displayed along horizontal axis while those of the other along vertical axes. Each possible combination of the two products is then plotted to obtain a budget constraint curve.

Given a fixed amount to buy two products A and B, a consumer can spend all the money on just one of the products. So, if all money is spent on product A, units of B will be zero and vice versa. However, the consumer will most likely buy the two products in a certain mix. This is because the marginal utility from each additional unit of the same product purchased declines gradually.

Example

Assume you have received a $50 app store gift card from your friend. You are considering buying video games and songs for your smartphone. The price of a game is $5 and that of a song is $1. You can either spend the whole amount on games, in which case the games purchased would be 10 [=$50/5]. Or you can spend the whole amount on music, in which case the number of songs purchased would 50.

Let us say the number of songs are represented along horizontal axis X and those of games along vertical axis Y. We now have two points on budget line (0,10) and (50,0).

The above combinations will rarely be purchased by a typical consumer. You are mostly likely to buy both games and songs in some quantity above zero. Let’s say you buy 6 games. That would be $30 [=4×5]. The remaining amount can buy you 20 songs. We now have another point on the graph (20,6).

If we plot the above points and any other possible combinations you might choose, we obtain a straight budget line as shown below:

Graph

Budget Line Graph

Attainable combination is any combination of two products which may be purchased using the given income. All points on or below the budget line are attainable, for example, 20 songs and 4 games.

Unttainable combination is any combination of two products which is impossible to purchase using the given income. All points above the budget line are un-attainable, for example, 30 songs and 6 games.