This is part of an introduction to indifference curve analysis. A budget line shows the combinations of two products that a consumer can afford to buy with a given income – using all of their available budget The gradient of the budget line reflects the relative prices of the two products

2. What is a budget line?
• A budget line shows the combinations of two products
that a consumer can afford to buy with a given income –
using all of their available budget
• The gradient of the budget line reflects the relative prices
of the two products
• The gradient of a budget line reveals the opportunity cost
• The budget line will shift when there is:
1. A change in the prices of one or both products with
nominal income (budget) remaining the same.
2. A change in the level of nominal income with the
relative prices of the two products remaining the same.

3. The Budget Line
Monthly
budget =
£60
Student
cinema
ticket =
£6
Casual
Dining =
£12 per
meal

4. Budget Line Combinations
• Spending all of the monthly budget:
• 10 x cinema tickets (no meals out)
• 5 x meals out (no cinema tickets)
• 6 cinema tickets and 2 meals out
• 4 meals out and 2 cinema tickets
• Each of these combinations would lie on the
budget line at current prices and current monthly
budget

5. £2 per kg £5 per kg
Weekly
Income = £40

6. The Budget Line
Sausages
Chicken
Wings
A budget line shows the
combinations of two
products that can be
afforded at current prices
and with all income spent.

7. The Budget Line
Sausages
Chicken
Wings
A budget line shows the
combinations of two
products that can be
afforded at current prices
and with all income spent.
BL110
0
4

8. The Budget Line
Sausages
Chicken
Wings
A budget line shows the
combinations of two
products that can be
afforded at current prices
and with all income spent.
BL110
20
0
4 8

9. The Budget Line
Sausages
Chicken
Wings
Initial Budget and Prices
Weekly income = £40
Price of sausages = £2 per kg
Price of chicken = £5 per kg
10
20
0
4 8
The consumer could buy
10kg of sausages and 4 kg of
chicken wings with his/her
initial budget.
Or any combination that lies
along the budget line.
e.g. 8 chicken wings and zero
sausages is also feasible
Or 20 kg of sausages and
zero chicken wings
BL1

10. The Budget Line
Sausages
Chicken
Wings
A change in prices
Weekly income = £40
Price of sausages = £2 per kg
Price of chicken = £2.50 per kg
10
20
0
4 8
A fall in the price of chicken to
£2.50 per kg (all other factors
held constant) will lead to a
pivotal outward shift of the
budget line from BL1 to BL2.
16
BL1 BL2

11. The Budget Line
Sausages
Chicken
Wings
A change in prices
Weekly income = £40
Price of sausages = £2 per kg
Price of chicken = £2.50 per kg
10
20
0
4 8
A fall in the price of chicken to
£2.50 per kg (all other factors
held constant) will lead to a
pivotal outward shift of the
budget line from BL1 to BL2.
This fall in the nominal price of
chicken has increased the real
purchasing power of the
consumer.
16
BL1 BL2

12. The Budget Line
A fall incomes
Weekly income falls to £30
Price of sausages = £2 per kg
Price of chicken = £5 per kg
Sausages
Chicken
Wings
10
20
0
4 8
BL1
15
6
BL2
5

13. The Budget Line
A fall incomes
Weekly income falls to £30
Price of sausages = £2 per kg
Price of chicken = £5 per kg
The fall in income (with prices
remaining the same) causes a
reduction in real purchasing
power for the consumer.
This causes a parallel inward
shift in the budget line. The
quantities that can be afforded
with this level of income are
lower than before.
Sausages
Chicken
Wings
10
20
0
4 8
BL1
15
6
BL2
5