A budget line represents the different combinations of goods or services that can be purchased with a given income or budget. It reflects the consumer's purchasing power and shows the trade-off between different goods. The budget line is typically represented graphically as a straight line or a curve.
To construct a budget line, the consumer's income is divided between the prices of the two goods being considered. For example, if the consumer has an income of $100 and goods A and B are priced at $2 and $5 respectively, the budget line can be represented as:
2A + 5B = 100
This equation shows that the consumer can purchase a combination of goods A and B such that the total cost does not exceed $100. The slope of the budget line measures the relative prices of the goods. If the price of good A increases, the slope of the budget line will become steeper, indicating that the consumer can purchase less of good A for a given amount of money.
The budget line also illustrates the concept of opportunity cost. If the consumer decides to purchase more of one good, they must be willing to give up some of the other good. This trade-off is represented by movement along the budget line.
In summary, a budget line shows the different combinations of goods or services that can be purchased with a given income or budget, taking into account the prices of the goods. It reflects the consumer's purchasing power and the trade-offs that must be made when choosing how to allocate their budget.
Budget line
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