Question

What determines the slope of the budget line?

Answer 1

Indifference curves show the tastes and preferences of the consumer. In order to find out what quantities of the two goods will be purchased by the household, we must also know how much expenditure the household wants to incur on these two commodities and what are the prices of the two commodities. This information, i.e., expenditure on two commodities and their prices, enables us to draw a budget line. While indifference curves tell us what choices the household would like to make; the budget line tells us what the household can do.

Let us draw a budget line and explain it by taking an example.

Suppose that the consumer has ₹ 200 to spend on food and clothing and suppose that the price of food is ₹ 20 per unit and price of clothing is ₹ 40 per unit. How much of food and clothing can the consumer buy, given the consumer's expenditure and the prices of two commodities? If the consumer spends entire amount of ₹ 200 on clothing, then 5 units of clothing and no units of food can be purchased. If the consumer buys 4 units of clothing at ₹ 40 per unit, then ₹ 160 will be spent on clothing and remaining ₹ 40 can be spent in buying 2 units of food. On the other extreme, if the consumer spends entire amount of ₹ 200 on food, then 10 units of food and no units of clothing can be bought. These and several other combinations of amounts of clothing and food are shown in Table. 

Units of Clothing	Units of Food	Expenditure
5	0	(5 × 40) + (0 × 20) = ₹ 200
4	2	(4 × 40) + (2 × 20) = ₹ 200
3	4	(3 × 40) + (4 × 20) = ₹ 200
2	6	(2 × 40) + (6 × 20) = ₹ 200
1	8	(1 × 40) + (8 × 20) = ₹ 200
0	10	(0 × 40) + (10 × 20) = ₹ 200

These combinations represent the maximum amounts that can be purchased with an expenditure of ₹ 200 at the given prices of food and clothing. We can illustrate these combinations graphically in diagram. The units of clothing are shown on the vertical axis and units of food are shown on the horizontal axis, and we have plotted various combinations of clothing and food from the Table. These points then are connected with a line. These points trace a downward sloping line, starting from the upper left with zero units of food and 5 units of clothing and ending on the lower right with 10 units of food and zero unit of clothing. All other combinations of clothing and food shown in Table 3.7, such as 4 units of clothing and 2 units of food, are shown on this line. This line is called the 'budget line' or 'price line'. It is called budget line because it shows various combinations of clothing and food which can be purchased with a budget of ~200 at given prices of the two commodities. Thus, a budget line shows various combinations of two commodities which can be purchased with a given budget at given prices of the two commodities.