What is budget line and indifference curve?
What is budget line and indifference curve?
A budget line shows combinations of two goods a consumer is able to consume, given a budget constraint. An indifference curve shows combinations of two goods that yield equal satisfaction. To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.
What is budget line with diagram?
Budget line definition The budget line is a graphical delineation of all possible combinations of the two commodities that can be bought with provided income and cost so that the price of each of these combinations is equivalent to the monetary earnings of the customer.
What is budget line SlideShare?
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What is budget line formula?
The budget line shows all the different combinations of the two commodities that a consumer can purchase, given his money income and the price of two commodities. The equation of a budget line is given by: M=PX. QX+PY.
What is budget line explain fully?
Definition: A budget line is a straight line that slopes downwards and consists of all the possible combinations of the two goods which a consumer can buy at a given market price by allocating all his/her income.
How does the indifference curve relate to the PPC?
At point m, the slope of the indifference curve is steeper than the slope of the production possibility curve—the price of good X is higher relative to the price of good Y than it should be and the marginal cost of good X is lower relative to the marginal cost of good Y than it should be.
What are the properties of budget line?
Properties of budget line Budget line is a straight line. Budget line has a negative slope. The slope of the budget line is negative of the price ratio. Budget line is tangent to indifference curve.
What is indifference curve in economics?
An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent. Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.
How indifference curves and budget line can be used to explain consumer equilibrium?
With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM quantity of commodity ‘X’ and ON quantity of commodity ‘Y.
How does the budget line on the indifference map moves of the consumer income increases?
When a consumer’s income increases, his budget line shifts parallel and upward and when his income decreases the budget line shifts downward. As the income changes, a new equilibrium is established and the consumer moves from one equilibrium point to another.
What is the other name of budget line?
The Budget line also known as the budget constraint indicates the combination of goods a consumer can purchase given his or her income and the prices in the market.
Why budget line is tangent to indifference curve?
Answer and Explanation: The indifference curve is tangent to the budget line when the consumer is maximizing his or her utility.
What causes the budget line to shift?
The budget line will shift when there is: A change in the prices of one or both products with nominal income (budget) remaining the same. A change in the level of nominal income with the relative prices of the two products remaining the same.
What is budget line example?
Example of Budget Line Suppose a consumer has an income of Rs. 50, and it will be used to buy commodities X and Y. To derive maximum utility from the said income, only the following options are available. The required budget line is obtained by plotting the above budget against the following graph.
What is indifference curve explain?
An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
How many indifference curves are tangent to a budget line?
one indifference curve
Since an infinite number of indifference curves exist, even if only a few of them are drawn on any given diagram, there will always exist one indifference curve that touches the budget line at a single point of tangency.
What determines the budgetary constraint or the price line?
However, one’s money income and prices of goods imposes a limit on the level of satisfaction that one may attain. Thus, the income at the disposal of the consumer in conjunction with prices of the commodities will determine the budgetary constraint or the price line.
What is indifference curve?
Create your free account to continue reading. 1. INDIFFERENCE CURVES AND UTILITY MAXIMIZATION Indifference curve – A curve that shows combinations of goods which gives the same level of satisfaction to the consumers so that an individual is indifferent. 2.
What does the budget line tell us?
• A budget line shows the combinations of two products that a consumer can afford to buy with a given income – using all of their available budget • The gradient of the budget line reflects the relative prices of the two products • The gradient of a budget line reveals the opportunity cost • The budget line will shift when there is: 1.
