A budget line is a graphical representation of all the combinations of two goods that a consumer

can afford given their income and the prices of the two goods. It is a straight line that slopes
downwards, reflecting the fact that the consumer can trade-off one good for the other while
remaining on the same budget.

Case Study Example

Suppose a student has a budget of $100 to spend on food and clothing. The price of food is $10
per unit and the price of clothing is $5 per unit. The student's budget line can be represented by
the following equation:

10F + 5C = 100

where F is the quantity of food consumed and C is the quantity of clothing consumed.

The following graph shows the student's budget line:

All the points on the budget line are equally affordable to the student. The student can choose
any combination of food and clothing that falls on the budget line.

If the student's income increases, the budget line will shift outwards. This means that the
student can afford to consume more of both goods. If the price of food increases, the budget line
will rotate inwards. This means that the student can afford to consume less of food, but more of
clothing.

Applications of Budget Lines

Budget lines are a useful tool for understanding consumer behavior and predicting economic
outcomes. They can be used to:

● Explain how consumers make choices about consumption.

● Analyze the impact of price changes and income changes on consumer behavior.
● Design optimal pricing strategies for businesses.
● Evaluate the impact of economic policies, such as taxation or subsidies, on consumer
welfare.

Budget lines are a powerful tool for understanding how consumers make choices and how their
choices are affected by various factors. They are widely used in economics and other fields to
analyze consumer behavior and inform decision-making.