Consumer’s Budget

What is a Budget Set? | What is a Budget Line?

Introduction

When we started with the economics, we discussed that the needs and wants of a consumer are unlimited whereas the resources to satisfy the needs and wants are limited, i.e., resources that can be useful to satisfy those wants are scare and hence we need to prioritize the allocation of resources in order to gain maximum utility or satisfaction from the goods and services a consumer consumes.

Consumer’s Budget

Continuing the above discussion, the income with the consumer which a consumer spends in order to buy goods and services to satisfy their wants is limited. And hence out of limited money, a consumer can buy limited quantum of goods and services, as those goods and services are available in the market at a given price. So out of the limited income, as per the prices of goods, consumer can buy limited set or combination of goods or services.

So here we got two important factors that are to be taken into consideration to see what consumption combination or bundles are available to consumer which are – a) The consumer’s income b) The prices of the goods and services. For simple understanding let us assume that there are two goods available to the consumer for consumption i.e., apples and bananas. Considering the two factors as discussed above i.e., fixed or limited income and prices of goods, the consumer can only afford to buy those combination or bundles of these two goods which costs either less than or equal to the level of income of the consumer. So these factors make up the consumer’s budget.

What is a Budget Set and a Budget Line?

Now let us assume that the income of the consumer is M and prices of apples per unit is p1 and prices of bananas per unit is p2. And the quantity of apples demanded by the consumer is q1 and quantity of bananas demanded by the consumer is q2.

Now comes the calculation part.

If the consumer wants to buy q1 quantity of apples, the consumer will need to spend p1q1 amount of money. At the same time to buy q2 quantity of bananas, the consumer will need to spend p2q2 amount of money. Hence the total amount to be spent consumer to buy q1 quantity of apples and q2 quantity of bananas will be p1q1 + p2q2. So as per the want and requirement, the consumer will need at least p1q1 + p2q2 amount of money. As we know the other main constraint or factor with prices of goods is the income M. So we can say, the consumer can buy any combination or bundle of apples and bananas as long as p1q1 + p2q2 is less than or equal to M. We can write it as;

p1q1 + p2q2 ≤ M

The above inequality is known as Consumer’s Budget Constraint.

And all the combination or bundles of goods (here apples and bananas) which are available to the consumer considering the amount of income as well the given market prices of those goods is called the Budget Set.

Let us take an example for the same.

Let us assume the price per unit for apples as well as bananas is Rs.5 and the income of the consumer is Rs.20. Also consider the amount of apple and banana can be bought in whole number only. So what can be the bundles or combinations of those that the consumer can buy given the above income of the consumer and the prices of the goods.

With given constraints the below combinations of apples and bananas can be bought by the consumer.

Apples	Bananas	Bundles	Price per unit	Total Cost
0	0	(0,0)	5	0
0	1	(0,1)	5	5
0	2	(0,2)	5	10
0	3	(0,3)	5	15
0	4	(0,4)	5	20
1	0	(1,0)	5	5
1	1	(1,1)	5	10
1	2	(1,2)	5	15
1	3	(1,3)	5	20
2	0	(2,0)	5	10
2	1	(2,1)	5	15
2	2	(2,2)	5	20
3	0	(3,0)	5	15
3	1	(3,1)	5	20
4	0	(4,0)	5	20

All the above bundles or combinations of apples and bananas are either costing less than or equal to the total income of consumer i.e., Rs.20. Any combination costing above Rs.20, for e.g., (3,3) costing Rs.30 could not be afforded by the consumer as they cost more at given market prices than the income available to the consumer.

In the above example, we had assumed that apples and bananas to bought in whole number, but in real life scenario there are several goods and services which can be bought in several denominations like half kg of wheat or half liter of milk etc. which are perfectly divisible according to quantity and price.

Thus we can say that a consumer’s budget set consist of all those bundles (q1, q2) which confirms that q1 and q2 are greater than or equal to zero and p1q1 + p2q2 ≤ M. This can be seen in graphical representation as follows;

Any point in the above quadrant of graphical representation represents a bundle of apple and bananas.

All the bundles that fall either on the line or below the line are part of the budget set.

The line in the above can be represented in equation form as p1q1 + p2q2 = M.

The line p1q1 + p2q2 = M, consists of all the bundles which costs exactly equal to M i.e., the total income and is known as the Budget Line. The area below the Budget Line consists of all the bundles which costs less than M.

Here we can see that the budget line is a straight line. The straight line has horizontal intercept M/p1 and vertical intercept M/p2. The horizontal intercept M/p1 shows bundle which entirely consists of Apples i.e., the consumer spends entire income on Apples and M/p2 shows bundle which entirely consists of Bananas i.e., the consumer spends entire income on Bananas.

Conclusion

In this session, we discussed in detail about Consumer’s Budget. We discussed the meaning of Budget Set and Budget Line. We also saw the graphical representation of the Budget Set and Budget Line.