The budget line represents all combinations of prices and goods. The total expenditure must correspond to the total income. The goods have a fixed price and the buyer has a fixed income.
Values above the budget line can not be acquired because the financial resources are not sufficient. Under the straight line the purchase is not optimized.
Calculation of the budget line
Variables are required to perform a calculation. This is once the budget and once the cost per product . The variables are listed below as examples.
| budget | Price of good 1 | Price of good 2 |
|---|---|---|
| 200 € | 2.50 € | 4,00 € |
Finally, the budget line is the graphical representation of all purchase options . In this principle, demand is regarded as infinite and the purchase is to be optimized. To draw a straight line, only two points are required in the diagram. The calculation of these points is as follows:
Max purchase good = budget / price of good
At our selected prices of the goods and the budget, the following values are obtained:
The results of the calculation are given in units as shown.
Drawing the Budget Line
A coordinate system contains an X and a Y axis. These are labeled with one of the two goods. The points are marked in the coordinate system at points (0/80) and (50/0).
These two points are connected with a straight line. This is the budget straight. This represents all possibilities for how these two goods can be acquired in different numbers. The budget is exploited according to the optimization principle.
If the budget is increased, the straight line can be shifted on the respective axes.
Alternative Calculation
The variables are usually given the following names:
- M = Budget (often referred to as income
- P1 = price of good 1
- P2 = price of good 2
- X1 = number of good 1
- X2 = number of good 2
The following formula can be used and solved for x2 in order to achieve the desired result:
In this way the slope can be calculated in the form of - (p1 / p2) . The formula should be applied in particular if the price can change. This is possible, for example, by additional taxation or a simple price change.
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