Question

What do you mean by Budget line? Explain it with the help of an example and diagram.

Hint:

Remember: slope of budget line $= -P_X/P_Y$; income shifts parallel, price changes pivot.

Answer 1

A budget line shows all bundles of two goods a consumer can buy given money income and prices. Algebraically: $P_XX+P_YY=M$, with slope $-\dfrac{P_X}{P_Y}$, $X$-intercept $M/P_X$ and $Y$-intercept $M/P_Y$. Points on the line are affordable with full income spent; inside are affordable with savings; outside are unaffordable.
Example: If income $M=600$, $P_X=60$ (pens) and $P_Y=30$ (notebooks), intercepts are $600/60=10$ pens and $600/30=20$ notebooks. Any combination on the straight line between $(10,0)$ and $(0,20)$ is just affordable; e.g., $(5,10)$ satisfies $60(5)+30(10)=600$.
Diagram (verbal): Plot pens on the $X$-axis and notebooks on the $Y$-axis; draw a straight downward line joining $(10,0)$ and $(0,20)$. A rise in income shifts the line parallel outward; a fall in income shifts it inward. A price change pivots the line around the other intercept.