Consumer Theory & Utility

budget line

If you draw a graph with one good on each axis, the budget line is the straight line showing every combination of the two goods you can buy if you spend all your money. Bundles below the line cost less than you have, so they are affordable but waste some money; bundles above the line are out of reach. The line itself is the affordable frontier, where every cent is spent.

Its slope tells you the trade-off the market imposes. If apples cost 2 dollars and bananas cost 1 dollar, then to buy one more apple you must give up two bananas, so the budget line slopes downward with a steepness equal to the price ratio, here minus 2. Where the line hits each axis shows the most of that good you could buy if you bought nothing else, your income divided by that good's price. Two things move the line: a change in income shifts it parallel, inward if you have less and outward if you have more, while a change in just one price swivels it, because the maximum amount of that one good changes while the other end stays put.

Combined with indifference curves, the budget line is how economists picture the consumer's best choice on a single diagram: the best affordable bundle sits where an indifference curve just touches the budget line. That tangency point neatly captures consumer equilibrium, and watching it slide as a price changes is one clean way to derive an individual demand curve.

With 20 dollars, movie tickets at 10 dollars and snacks at 2 dollars, your budget line runs from 2 movies and 0 snacks to 0 movies and 10 snacks. If snack prices fall to 1 dollar, the line swings out along the snack axis to 20 snacks while the movie end stays at 2.

The budget line shows every bundle that spends your money exactly.

A price change tilts the line; an income change shifts it parallel. Confusing the two is a frequent mistake, and the slope reflects relative prices, not how much you like each good.

Also called
budget constraint lineprice line消费可能线