Price-income line or Budget line

An indifference map indicates the preferences of consumer but the actual selection depends upon his income and the prices of goods.  So,  in order to find out consumers equilibrium we need to know about the budget line.

MEANING 

 The Budget Line, also called as Budget Constraint shows all the combinations of two commodities that a consumer can afford at given market prices and within the particular income level.

 According to Prof.Salvatore, "The budget line shows all the different combinations of the 2 commodities that a consumer can purchase , given his or her income and the price of two commodities."

 EXPLANATION

We can explain a price or budget line with the help of a table and diagram.
Suppose the monetary income of a consumer is Rs. 40 which he wants to spend on 2 goods X and Y. The price of Good-X is Rs. 2/unit and that of Good-Y is Rs. 1/unit. Given his income and prices of 2 goods,  the alternative consumption or expenditure possibilities of a consumer are shown in the table below.

**draw the table
In the above table the 1St and 5TH combination is not valid because he has to buy only a combination of two goods. So all the other possible combinations have been shown in the above table.

**draw diagram
In the above figure, the various combinations of the table are shown by the BL line. This is the PRICE or BUDGET LINE. Given Rs. 40 with the consumer,  he can buy any one combination Q, R or S of goods X and Y. But he cannot obtain equilibrium at any point beyond this line such as combination A because it is out of reach of his income. On the other hand, he cannot obtain the equilibrium combination even inside the BL line such as combination N because Then he will not be spending his entire income on both goods X and Y as the prices will be low. Thus, a consumers budget line is his Budget limit or Budget Constraint line.

CHANGES IN BUDGET LINE

A Consumer's budget line will be affected by changes in price and income.

(A) Change in price -If the consumer income does not changes but the price of goods X and Y change,  then the slope of his budget line will change.
**draw diagrams
If price of Good X is constant with a fall in price of good Y the his budget line BL will rotate outward from point L to LB2. This is because he buys more qty of Y than before. Conversely, with the increase in its price, his budget line BL will rotate to BL1 because he purchases less qty of Y than before.

(B) Change in income- The prices of X and Y remaining constant,  if the consumer's income or budget increase or decrease, his budget line will aLos change.
**draw diagram
If income increases the budget line will shift outwards from BL to B2L2. On the other hand, if income falls, BL line will shift inwards to B1L1.

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