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Economic Theory

Figure 6.3 – Budget line

Figure 6.3 shows the above three possibilities. The line LM represents
maximum amount of biscuits (50) and to tea (40 cups), which the
consumer can buy with his income of Rs.20. The line LM shows that the

consumer cannot choose any combination beyond this line because his
income does not permit him. Nor would he like to choose a combination
below this line; say, B, as it will not represent the maximum satisfaction.

Line LM is known as the budget line since it represents the various
amounts the consumer can buy with his income; it is also known as the
price-ratio line or simply the price line since its slope represents the ratio

of prices of the two goods.

Figure 6.4 – Consumer’s equilibrium

The consumer gets the maximum possible satisfaction from his given
income at point C on the indifference curve I3. At this point, he buys a

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