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A budget straight line marks that straight line in the on which all points are, which represent combinations of goods, at which the spent sum total of a consumer equal the income (budget) are. According to the consumer theory each consumer is confronted due to its limited income with a restriction of budget. Each consumer strives to obtain its personal optimal use to reach i.e. its household optimum.

Construction

A consumer buys (for the sake of simplicity) with its budget, which it spends completely, only two goods. The quantity per time unit (e.g. one month) of the property (property 2) becomes on the horizontal, the quantity of the other property (property 1) on the vertical axle of a two-dimensional coordinate system within the positive range (1. Quadrant) laid on. Budget straight lines now represented as straight line, which reaches to the horizontal from the point of of the vertical axle, in which the respective person spends her entire budget on property 2, up to that point on axle, in which the person spends her entire budget on property 1. The budget straight line represents now all combinations of the two goods, which the consumer with its fixed income can acquire. At the respective extremes (intersection of the straight lines with an axle) only one property is consumed, i.e. the entire income is spent only on this property. Between these extremes each goods combination on the budget straight line can be selected by the consumer with existing income.

Example

Mr. P. buys only water bottles (property 1) and bread loaves (property 2). A water bottle costs 1 euro, a bread loaf 2 euro. Mr. P. has a monthly income of 40 euro. He can select, as evident on the budget straight line, either 40 water bottles and no bread loaf, 20 bread loaves and no water bottle or each combination of the two goods, which are on the budget straight line (e.g. 10 bread loaves and 20 water bottles or 8 bread loaves and 24 water bottles).

Computation

Price of property 1 quantity of property 1 + price of property 2 quantity of property 2 = incomes

Therefore arise for the "extreme values" (i.e. the zeros of the budget line)

Only Gut1: x1= Y/p1Nur Gut2: x2= Y/p2

The upward gradient of the budget straight lines corresponds to the negative quotient of both prices: - p2/p1

x1, x2 are the quantities of the goods; P1, p2 the prices, and Y is the income.

See resuming also

  • Household optimum

Literature

  • Pindyck/Rubinfeld: . Pearson study, ISBN 3827371643

Articles in category "Budget straight line"

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