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Difference between Budget Line and Budget Set

Sayeba Naushad
Published: February 21, 2023

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What is Budget Line?

A graphical representation of all possible combinations of two goods which a consumer can purchase with the given prices and income in a way that the cost of each of these combinations is equal to the consumer’s money income is known as a budget line. a budget line is also known as Price Line. For example, a consumer’s income is ₹10 and he wants to spend the money on two commodities, say X and Y and both of these goods are priced at ₹5 each. Now the consumer has three options for spending his income. The first option is to buy two units of commodity X. Second option is to buy two units of commodity Y. or the third option is to buy one unit of commodity X and one unit of commodity Y. This means that the possible bundles, in this case, can be (2, 0); (0, 2); and (1, 1). Now, when all of these three bundles are represented on a graph, a downward-sloping straight line is formed which is known as a budget line.

What is Budget Set?

The set of all possible combinations of the two commodities a consumer can afford to buy with his given income and price in the market is known as a budget set. In the above example, besides the three options; viz., (2, 0); (0, 2); and (1, 1), there are some other options which are available for the customer within his total income of ₹10, even if he does not spend his entire income. A budget set in this case will include all the bundles which have a total income of ₹10. The possible Consumer’s Bundles are (0, 0); (0, 1); (0, 2); (1, 0); (2, 0); and (1, 1). Hence, a consumer’s bundle is a quantitative combination of two goods which a consumer can purchase from his given income.

Difference between Budget Line and Budget Set

Basis

Budget Line

Budget Set

MeaningA graphical representation of all possible combinations of two goods which a consumer can purchase with the given prices and income in a way that the cost
of each of these combinations is equal to the consumer’s money income.
The set of all possible combinations of the two commodities a consumer can afford to buy with his given income and price in the market.
Lies onAll the bundles of a budget line lie only
on the budget line.
All the bundles of budget set lie either on or below the budget line.
RepresentsA budget line represents the maximum limit
a consumer can spend on buying goods.
A budget set represents all the sets of two goods that fall on or before the budget line.
SetsThe sets of two goods represented on the budget
line are equal to the consumer’s income.
The sets of two goods represented on the budget set are equal to or less than the consumer’s income.
InterrelationshipA budget line is the border line of the budget set.A budget set shows the different combinations of two goods helping in drawing a budget line.
EquationM = (PA x QA) + (PB X QB)M ≥ (PA x QA) + (PB X QB)

Source: www.geeksforgeeks.org