Glossary term
Budget Line: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
The budget line is the set of all bundles of two goods that cost exactly the consumer's whole income at the given prices. Its equation is p₁x₁ + p₂x₂ = M, and its slope is −p₁÷p₂. Bundles on or below it form the budget set, which is what she can afford.
In more detail
The budget line shows what a consumer can afford. Raising income shifts it outwards in parallel, while a fall in one price pivots it, leaving the other intercept fixed. The consumer chooses the most preferred bundle from this affordable set, which is where the line touches the highest indifference curve.
Example
With income ₹20 and prices ₹4 and ₹5, the line meets the axes at 5 units of good 1 and 4 units of good 2. If income rises, the line shifts out in parallel; if the price of good 1 falls, it pivots outwards.
Key points
- Slope = −(price of good 1) ÷ (price of good 2).
- A change in income shifts it in parallel.
- A change in one price pivots it around the other good's intercept.
Common mistake
Treating a price change as a parallel shift. Only an income change shifts the line in parallel.
Related terms
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 2: Theory of Consumer Behaviour.