Budget Line and Budget Set:

Budget Line:
A budget line is a graphical representation of the different combinations of two goods that an individual or a consumer can purchase with a given income and prices of the goods. It represents the limit of a consumer's purchasing power.

The budget line shows all possible combinations of two goods that can be purchased by a consumer, given their income and the prices of the goods. It illustrates the trade-off between the two goods, as the consumer has limited resources and must allocate their income between the goods.

Diagram:
To understand the concept of a budget line, let's consider a simple example with two goods: X and Y. The price of good X is Px, and the price of good Y is Py. The consumer has an income I.

In the diagram, the horizontal axis represents the quantity of good X, and the vertical axis represents the quantity of good Y. The slope of the budget line is given by -Px/Py, which represents the rate at which the consumer can trade one good for another.

The budget line is a straight line that connects the intercepts on the X and Y axes. The intercept on the X axis represents the maximum quantity of good X that can be purchased with the entire income, and the intercept on the Y axis represents the maximum quantity of good Y that can be purchased with the entire income.

The budget line can shift inward or outward based on changes in income or prices. If the price of one good increases, the budget line will rotate inward, indicating a decrease in purchasing power. Conversely, if the price of one good decreases or the income increases, the budget line will rotate outward, indicating an increase in purchasing power.

Budget Set:
The budget set is a set of all possible consumption bundles or combinations of goods that a consumer can afford given their income and the prices of the goods. It represents the feasible choices available to the consumer within their budget constraint.

The budget set is determined by the consumer's income and the prices of the goods. It includes all combinations of goods that are affordable, taking into account the consumer's budget constraint.

Diagram:
The budget set is represented by the area below or on the budget line. It includes all points on the budget line and below, indicating the combinations of goods that the consumer can afford.

In the diagram, the budget set is the shaded area below the budget line. Any point within this area represents a feasible combination of goods that the consumer can purchase. The consumer can choose any point within this area based on their preferences.

Changes in income or prices can shift the budget set. An increase in income or a decrease in prices will expand the budget set, allowing the consumer to afford more combinations of goods. Conversely, a decrease in income or an increase in prices will shrink the budget set, limiting the available choices for the consumer.