What is budget line Why is it important in indifference curve analysis?

A budget line shows combinations of two goods a consumer is able to consume, given a budget constraint. An indifference curve shows combinations of two goods that yield equal satisfaction. To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.

What is tangent to indifference curve?

In graphical terms, the new budget constraint will now be tangent to a higher indifference curve, representing a higher level of utility. A reduction in income will cause the budget constraint to shift to the left, which will cause it to be tangent to a lower indifference curve, representing a reduced level of utility.

Why consumer get maximum satisfaction when the indifference curve is tangent to the budget line?

Budget line should be tangent to the indifference curve A budget line can be drawn on the basis of expenditure plan. Thus, the consumer will be in equilibrium (achieve maximum satisfaction at any given level of income) where the budget line is tangent to the indifference curve, i.e. at point E on IC2.

What is the significance of the budget line?

A budget line shows the combinations of two products that a consumer can afford to buy with a given income – using all of their available budget.

How does the budget line on the indifference map moves of the consumer income increases?

3.12, when a consumer’s income increases, his budget line shifts parallel and upward and when his income decreases the budget line shifts downward. As the income changes, a new equilibrium is established and the consumer moves from one equilibrium point to another.

What is the significance of a budget line in economics?

Why does budget line slope downward?

The budget line is downward sloping because when more and more units of one good are bought, it leads to a decrease in some units of other goods, with the given income.