Price ratio
Also called: Slope of the budget line · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
The price ratio is p₁/p₂, the price of good 1 divided by the price of good 2. It is the slope of the budget line without the minus sign. It tells you the rate at which the market lets a consumer swap one good for the other. One extra unit of good 1 costs p₁, which is the price of p₁/p₂ units of good 2. At the consumer's best choice, the price ratio equals her marginal rate of substitution (MRS), which is the rate at which she is willing to swap.
Example
A banana costs ₹4 and a mango costs ₹5, so the price ratio is 4/5 = 0.8. To buy one more banana within the same budget, she must give up 0.8 of a mango. If the mango price falls to ₹4, the ratio becomes 1, and one banana costs exactly one mango.
Don't confuse with
- Marginal rate of substitution: MRS reflects the consumer's own tastes. The price ratio is set by the market and is the same for every buyer.