Budget of a Consumer

Budget of a Consumer

Budget Set of a consumer refers to attainable combinations of a set of two goods, given prices of two goods and the consumer of the Income.

The Budget set equation or Budget equation is: P₁X₁ +P₂ X₂

Where P₁=Price of Good-1, X_{1 =} Quantity of Good-1;

            P₂= Price of Good-2 and X_{2 =} Quantity of Good-2;

            Y is the total expenditure or total budget 

Budget Line: Budget line is a line showing different possible combinations of Good-1 and Good -2, which a consumer can buy, given his budget and the prices of Good-1 and Good-2. Anywhere on the budget line, a consumer is spending his entire income either on Good-1 or on Good-2 or on both Good-1 and Good-2. 

Slope of the budget line/Price Line is also given by Market Rate of Exchange (MRE).  It must be noted that the budget line/price line is a straight line because MRE is constant at all points on the budget line /Price Line as prices are given in the market.

Shift in Budget Line

Budget Line shifts forward (without changing its slope) when income of the consumer increases. Prices are assumed to be constant.

Budget Line shifts backward (without changing its slope) when income of the consumer decreases. Prices are assumed to be constant. 

Rotation of Budget Line 

Budget Line rotates to the right when price of either commodity decreases whereas it rotates to the left when of either commodity increases.