What is a Budget Line?
A graphical representation of all possible combinations of two goods that a consumer can purchase with the given prices and income in a way that the cost of each of these combinations is equal to the consumer’s money income is known as a budget line. a budget line is also known as a Price Line.
For example, a consumer’s income is ₹10 and he wants to spend the money on two commodities, say X and Y, and both of these goods are priced at ₹5 each. Now the consumer has three options for spending his income. The first option is to buy two units of commodity X. The second option is to buy two units of commodity Y. or the third option is to buy one unit of commodity X and one unit of commodity Y. This means that the possible bundles, in this case, can be (2, 0); (0, 2); and (1, 1). Now, when all of these three bundles are represented on a graph, a downward-sloping straight line is formed which is known as a budget line.
Difference between Budget Line and Budget Set
A budget line and a budget set are two essential concepts that help understand consumer choice and behavior under different constraints. The budget line represents all possible combinations of two goods that a consumer can purchase given their income and the prices of the goods. The budget set includes all the combinations of two goods that a consumer can afford given their income and the prices of the goods.