Consumer’s Budget

Consumer means the person who buys goods and services for their personal use. Budget plays a vital role in this, which is defined as the estimations of expenses and revenues that help them better allocate their finances.

Budget set and Budget line are the most important terms that help incomplete understanding of consumer budget.

What is a Consumer Budget? 

Consumer Budget means purchasing power or the spending power of a consumer with which the consumer can buy a set of two different goods in which their prices are mentioned. It also means the customer’s limitation due to the fixed income and what combination he purchases. It is also referred to as the consumer’s purchasing power to buy or purchase the bundles of two (2) goods at market price.

For example, if a consumer has an income of $1000 and made a budget of $500 to spend on the two different commodities, commodity a is $350, and commodity b is $ 150. In this case, the consumer has to buy both commodities so that his budget does not exceed, and he has the perfect combination of both.

Budget set

The set of bundles attainable to the consumer, given his income and price of goods, is called a budget set. The budget set is, thus, the collection of all bundles that the consumer can afford to buy with his/her income at the prevailing market prices. 

The equation of the budget’s set is- Px*Qx + Py*Qy<M

• So, Px is the Price of a good X
• Qx is the Quantity of the good X
• Qy is the Quantity of the good Y
• M is the money income

The two factors which are taken into consideration while making a budget are:

• Price of commodity- price * quantity for a given commodity determines the total expenses incurred on that particular commodity.
• The consumer’s income means the saving and consumption opportunity, which the consumer can spend on the possible combinations of commodities of his choice and therefore is affordable for him.

The budget line equation means the set/bundle of two different goods (say X and Y) that cost precisely equal to the consumer’s income. The budget line is a limiting factor for the consumer beyond which he cannot go, which means the consumer can only afford to buy combinations that fall along his budget line or inside it. He cannot afford to purchase combinations that are above his budget line.

Equation of budget line, M= Px Qx + Py Qy

• M= given money income
• Px and Py = per unit price of goods X and Y
• Qx and Qy= Quantity of the goods X and Y

It is assumed here that the consumer spends all of his money income.

Change in budget line

The budget line may change under two situations:

• Change in the income of the consumers.
• Change in the price of the commodities.

Budget line assumptions

The budget line mainly depends on assumptions of:

• The income of the consumer remains fixed.
• The prices of the commodity are given, and it also remains constant.
• The person or consumer has the perfect knowledge about the prices of the commodity.
• It is assumed that the consumer spends his entire income and spends the whole income.

Indifference curve

An indifference curve represents all the combinations of two different commodities, which provides the same satisfaction level to a consumer or in other words, an Indifference curve is the locus of all the bundles of two various goods, which gives an equal consumer level of satisfaction, that he is indifferent between the bundles.

Properties of an indifference curve

• When prepared as a diagram, the indifference curve slopes downward to the right or is negatively sloped, as consumption of both the goods cannot be increased at once.
• The indifference curve is convex to the origin point due to the diminishing (MRS) Marginal Rate of Substitution.
• Two indifference curves can never touch or intersect each other.

The indifference curve is convex to origin, as it represents all those amalgamations of two different goods, which give a consumer the same amount of satisfaction.

Indifference curves appear convex to the point of origin in diminishing (MRS) marginal rate of substitution. This implies that for each additional unit or quantity of a good X, a consumer wants to sacrifice a lesser amount of the commodity Y because of applying the Law of diminishing (MU) marginal utility.

Conclusion

These notes will be beneficial for the students preparing for their exams or for anyone looking to learn about consumer’s budget.