Budget line and its economic interpretation, Managerial Economics

The Budget line and its economic interpretation

The indifference curve shows us consumer preferences but it does not show us the situation in the market place.  Here the consumer is constrained by income and by the prices of X and Y.  They can both be shown by a budget line.  Suppose that product X costs K£2 per unit and product Y K£1 per unit and that the consumer's income is K£10.

A budget line shows all the combinations of two products which can be purchased with a given level of income.  The slope of the line shows the relative prices of the two commodities.

If the consumer is inside the budget line, e.g. at point E he is consuming les than the income.  Thus he can consume more of X or more of Y or more of both.  If he is on the budget line e.g. at point C he is spending the full budget.  He is said to be consuming to budget constraint.  To consume more of X e.g. moving from C to D, he must consume less of Y and vice versa.  For a given budget and given price, he cannot be at a point off the budget line to the right, e.g. at point F.

Posted Date: 11/27/2012 5:24:26 AM | Location : United States







Related Discussions:- Budget line and its economic interpretation, Assignment Help, Ask Question on Budget line and its economic interpretation, Get Answer, Expert's Help, Budget line and its economic interpretation Discussions

Write discussion on Budget line and its economic interpretation
Your posts are moderated
Related Questions
Consider a manufactured good whose production process generates pollution. The annual demand for the good is given by Qd=100-3P. The annual market supply is given by Qs=P. In both

What is Demand theory: Demand theory relates to the study of consumer behaviour. It addresses questions like what incites a consumer to buy a particular product, why do consume

Interest rates Decreasing the rate of interest may not encourage investment but increasing the interest rate tends to lock up liquidity in the financial system.

KEYNESIAN AND NEW-KEYNESIAN THEORIES OF UNEMPLOYMENT AND THE BEHAVIOUR OF REAL WAGES    As  mentioned  above, two  phenomena  about the  labour market  need  to  be explained:

Schumpeter Description According to Schumpeter, a cycle represents wave like deviations in business activity from the equilibrium or trend line. There are equilibrium points an

'' monopoly is good for consumer welfare" is this crrect


Suppose that the price elasticity of demand for cereal is -0.75 and the cross-price elasticity of demand between cereal and the price of milk is -0.9. If the price of milk rises by

Custodian of Member Banks Cash Reserves As bankers bank the central bank performs several function. It keeps the cash reserves of commercial banks in the economy and thus acts