- Suppose that the consumer (household) consumes only two goods (X and Y).
Given the Prices of the two goods XP ,YP ) and the consumer’s income (m), the possible
quantities purchasable by the consumer (o , o ) are constrained by
PXX o P Y om
e.g., Suppose that a student has a budget for coffee and milk of $100/month. If the price of
Coffee (X say) is $1/cup and the price of Milk (Y) is $2/litre, the budget constraint is
$1*Q + $2*Q $100
Note: We can define one of the goods (Y say) as a composite commodity, representing all goods
other than X.
Definition: The maximum combination of two commodities purchasable by a consumer given
the prices of the two commodities and the consumer’s money income
Rearranging the budget equation for the assumption that all income is spent gives the Budget line
Yo = m/P Y P /X *Y 0
e.g. The budget line for Coffee and Milk with Milk as the Y commodity is
Q M $100/$2 – $1/$2*Q = 5C – 0.5Q C