Budget Set - Class 12 PDF Download

Budget Set

There are two factors that affect a consumer’s choice of quantities to purchase between two goods: prices and money income. Price times quantity for each good gives us the expenditure incurred on purchasing a good. In our analysis, there are two goods. So, the expenditure on both goods must be less than or equal to the money income of the consumer. This is the budget constraint faced by a consumer. It is depicted as:

P1.X1 + P2.X2 <= M

All those bundles that satisfy this criterion are set to form a part of what is called the budget set. The consumer can choose to consume out of any of these bundles.

Budget Line

In consumer budget, the graphical representation of all such bundles which cost the consumer exactly his money income is called the budget line. The equation of the budget line is, therefore:

P1.X1 + P2.X2 = M

We measure the quantity of good 1 on the horizontal axis and that of good 2 on the vertical axis. We can depict the budget line by calculating the horizontal and vertical intercept. The intercepts are the maximum of each good the consumer can afford to buy.

So, horizontal intercept = M/P1 (the consumer buys only good 1, X2 = 0)

And, vertical intercept = M/P2 ­(the consumer buys only good 2, X1 = 0)