Price line or Budget line:
Demand for a good depends upon
(i) preference for that good and (ii)
purchasing power. The preference pattern is represented by set of Indifference curves. The purchasing power depends on his money income and price of the goods.The money income and price level are represented by budget line. The budget line is a downward sloping straight line connecting X axis and Y axis as follows.
OA – income, OA/OB price of X good.
The budget line is the line joining various
combinations of the two goods which the
consumer can buy at given prices and income.
The consumer reaches equilibrium at the
point where the budget line is tangent on
the indifference curve.T is the point of equilibrium as budget
line AB is tangent on indifference curve
the upper IC which implies maximum
possible level of satisfaction.
At equilibrium point, the slope of IC
refers to MRSXY and the slope of BL (Budget
Line) refers to ratio of price of X to price of
Y ie Px/Py. Therefore MRSx,y= Px/Py.
An understanding of consumer behaviour
is an important part of comprehending the allocation of resources by individuals.
Consumption decisions are made based upon a logical process of valuing utility,price and income alternatives. Demand analysis enables the producers to understand consumer behaviour and take proper decisions accordingly.