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Budget Line

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Budget Line 

The set of consumption bundles that cost exactly as much money as a consumer’s total income.

(Dwayne Benjamin, Toronto PPG 1002H)

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The budget line is also known as the "budget constraint". In a two good model, the budget line shows all of the bundles that a consumer can choose between if he decides to spend all of his income.  

Consumer theory holds that the consumption bundle that an individual will ultimately choose is the bundle that is found where the budget line is tangent to one of his indifference curves. Choosing a point on the budget line rather than from any other point in the budget set allows the consumer to reach the highest possible indifference curve given his income, thereby maximizing his utility.  

 

References

 

This material was prepared by students at the University of Toronto School of Public Policy and Governance and edited by Ben Eisen.

  


Important Notices
© University of Toronto 2008
School of Public Policy and Governance