Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 4] CONSUMER DEMAND THEORY 67
Fig. 4-3
Fig. 4-4
4.6 THE BUDGET CONSTRAINT LINE
The budget constraint line shows all the different combinations of the two commodities that a consumer
can purchase, given his or her money income and the prices of the two commodities.
EXAMPLE 10. Suppose that P x ¼ P y ¼ $1, that a consumer’s money income is $10 per time period and that it is all spent
on X and Y. The budget line for this consumer is then given by line KL in Fig. 4-4. If the consumer spent all of her income on
commodity Y, she could purchase 10 units of Y. This defines point K. If she spent all of her income on commodity X, she
could purchase 10 units of X. This defines point L. By joining point K to point L by a straight line we define budget line KL.
Budget line KL shows all the different combinations of X and Y that this individual can purchase given her money income
and the prices of X and Y.
4.7 CONSUMER EQUILIBRIUM
A consumer is in equilibrium when, given personal income and price constraints, the consumer maximizes
the total utility or satisfaction from his or her expenditures. In other words, a consumer is in equilibrium when,
given his or her budget line, the person reaches the highest possible indifference curve.
EXAMPLE 11. By bringing together on the same set of axes the consumer’s indifference curves (Fig. 4-2) and budget
constraint line (Fig. 4-4), we can determine the point of consumer equilibrium. This is given by point E in Fig. 4-5.
Fig. 4-5