The budget line shows all those combinations of two goods which the consumer can buy by spending his given money income on the two goods at their given price.

#### Or

The budget line can be defined as a set of combinations of two commodities that can be purchased if the whole of a given income is spent on them and the slope is equal to the negative of the price ratio.

**Important Note: **Other names in the literature for the budget line are the Price line, Price opportunity line, Price income line, Outlay line, budget constraint, expenditure line, and consumption possibility line.

### Understanding the Price Line Concept with Example:

Our Maximum Budget (M) is **40 Rs**.

The cost of 1 apple is **1 Rs **which is on the** Y-axis **and the** **cost of 1 Banana is **2 Rs** which is on **X-axis**.

Maximum apple we can buy, if we don’t purchase any banana – Total Budget/ Price of Apple = 40/1 = **40 apples**

The maximum banana we can buy, if we don’t purchase any apple – Total Budget/ Price of Banana= 40/2 = **20 bananas**

**(0,40), (20,0) are the extremes points.**

### Deriving Budget line Equation

Let, **Px– **Price of X commodity , **Py – **Price of Y commodity

**X** – commodity 1 which is on X axis , **Y** – commodity 2 which is on Y axis

### Formula- Px(X)+ Py(Y)= M

**Situation 1:** If we purchase 0 (zero) units of product X, Then

Px(0) + PyY=M

PyY=M

** Y =M/Py**

**Situation 2:** If we purchase 0 (Zero) units of product Y, Then

PxX + PyY = M

PxX + Py(0) = M

PxX= M

**X= M/Px**

The extreme points are **(M/Px,0) , (0,M/Py)**

### For Finding Slope of Budget Line

We use **Tan θ** for finding the slope because it has relationship between perpendicular and base and in graph it is X axis (Base), Y axis (Perpendicular)

Tan θ = Perpendicular/ Base

Tan θ = M/Py / M/Px

Tan θ = M/Py multiply Px/M (M,M is cancelled out)

**Tan θ = Px/Py**

**Note: **Therefore, the Slope of the Budget line is **Px/Py** or we can say that The slope of the Budget line is the ratio of prices.

## Budget Space:

A budget space shows a set of all commodity combinations that can be purchased by spending the whole or a part of the given income.

### Change in Price and Shift in Budget Line

**Case 1: **When the Price of Commodity X is reduced

**Case 2: **When the price of commodity Y is changed

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