The Budget Line

Consumer’s choices are limited by the budget available. Total spending for goods and services can fall short of the budget constraint but may not exceed it.

Suppose a college student, Rocky, wants to go in for Music classes and Karate classes. A day spent pursuing either activity costs $50. Suppose she has $250 available to spend on these two activities each semester.

 

budget line graph

 

The budget line shows combinations of the Music classes and Karate classes Rocky could consume if the price of each activity is $50 and she has $250 available for them each semester. The slope of this budget line is -1, the negative of the price of Music classes divided by the price of Karate classes

For a consumer who buys only two goods, the budget constraint can be shown with a budget line. A budget linebudget lineGraphically shows the combinations of two goods a consumer can buy with a given budget shows graphically the combinations of two goods a consumer can buy with a given budget.

As the Price of karate classes will fall relative to Music classes, Rocky will substitute Karate classes for Music Classes. This is known as the substitution effect of a price change.

 

 

 

 

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