Consumer Behaviour...

Budget Line:
In Indifference curve showed the taste and preference of the consumer and what quantities of two
goods will be purchased by the household and how much expenditure and prices paid by the household
to incur on these two commodities, this enables us to draw a budget line.

‘A budget line shows various combinations of two commodities which can be purchased with a given
budget at given price of the two commodities.’

Let us draw a budget line and explain it with the example of a Table :
Units of clothing Units of food Expenditure
5 0 (5x40) +(0x20) = Rs.200
4 2 (4x40) + (2x20) = Rs. 200
3 4 (3x40) + (4x20) =Rs. 200
2 6 (2x40) + (6x20) =Rs.200
1 8 (1x40) + (8x20) = Rs.200
0 10 (0x40) + (10x20) = Rs.200

Suppose that consumer has Rs. 200 to spend on food and clothing and that the price of food is Rs.20
per unit and for clothing Rs. 40 per unit. How much of food and clothing can be purchased with the
given expenditure .

If the consumer spends entire amount of Rs.200 in on clothing, then 5 units of clothing and no units of
food can be purchased , and if he buys 4 units of clothing then he spends only Rs. 160(4x40) , now
from remaining Rs. 40 he can buy 2 units of food and so on.

This can be illustrated graphically, Units of clothing on the vertical axis and units of food on the
Horizontal Axis , and then we plot various combinations of food and clothing from the Table , these
points are connected with a line downward sloping because if consumer wants to purchase more
amount of one commodity , he has to sacrifice some amount of other commodity.

The ratio is Px/Py, where Px is price of commodity on horizontal axis (food) and Py is price of
commodity on vertical axis (cloth)

Graph

Properties of Budget Line

1. It is negatively sloped line.

2. The slope of budget line is equal to the price of two commodity.

3. It is a straight line as we assume prices of two commodities while drawing it.

Assumption: 1.Money income of consumer is fixed.

2. The price of two commodities are given.

 Consumer’s equilibrium through Indifference Curve Approach

“A consumer attains his equilibrium when he maximises his total utility, given his income and price
of the two commodities.”

We combine the indifference curve and the budget line on the same diagram to illustrate consumer
equilibrium.

Graph

Clothing on the Y axis and Food on the X axis, KL is the budget line

The consumer cannot purchase any combination , which lies to the right of the budget line KL such
as combination D because it is out of his reach with the given income and price. On the other hand
any combination inside the budget line such as A is within his reach, but lies on a lower indifference
curve.

The highest indifference curve with a point on a budget line is the one which just touches i.e Tangent
to the budget line at point T, the Tangency point, is the highest level of utility i.e the combination of
OM of clothing and ON of food that the consumer purchases.

Conclusion

Point A is not best as it is inside the budget line

B is not best as it lies on a lower indifference curve. IC1

T is on a higher indifference curve IC2

Point D is preferred to T but lies on higher indifference curve IC3, not feasible as it is outside the
budget line.

condition of consumer’s equilibrium in another way:-

1. MRS = Price Ratio of two goods

Or

MRSxy = Px

Py

2. IC curve should be Convex to the origin, which will anble the consumer to attaine stable equibrium.