Budget line and its economic interpretation, Managerial Economics

Assignment Help:

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.


Related Discussions:- Budget line and its economic interpretation

Compettitive market, Tomato Farm is selling tomatoes in a purely competitiv...

Tomato Farm is selling tomatoes in a purely competitive market. Its output is 5000 bushels, which sell for $15 a bushel. At this level of output, the marginal cost is $15 bushel an

Average propensity to consume, Average Propensity to Consume The avera...

Average Propensity to Consume The average Propensity to Consume [APC] is defined as the fraction of aggregate national income which is devoted to consumption.  If consumptio

Determinants of consumption function, Other Determinants 1.          R...

Other Determinants 1.          Rate of Interest Is contained in the argument of the classified economists who argued that rational consumers will save more and consume les

Measurement of inflation, Measurement of Inflation The rate of inflati...

Measurement of Inflation The rate of inflation is measured using the Retail Price Index.  A retail Price Index aims to measure the change in the average price of a basket of g

Explain the concept of demand function, Q. Explain the concept of demand fu...

Q. Explain the concept of demand function? Identical to the demand theory which pivots around the concept of demand function, theory of production revolves around the concept o

Utility analysis or cardinal approach, Utility Analysis or Cardinal Approac...

Utility Analysis or Cardinal Approach: The Cardinal Approach to the theory of consumer behavior is based upon the concept of utility. It assumes that utility is capable of meas

Short run cost , What will be the table of total cost function?

What will be the table of total cost function?

Investment, Investment   Investment is the process of increasing the ...

Investment   Investment is the process of increasing the productive capital stock of a country, or can be defined as the production of goods not for immediate consumption.  T

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd