Can You Explain The Budget Line?

Mathematically the BL is the locus of all the combination of x and y that satisfy the equation. xPx + yPy = I. thus BL represents all those points which enables to exhaust the consumer's fixed income.The BL divides the entire commodity space into the attainable pairs and the unattainable pairs.

The BL divides the commodity space into the triangular area OAF and rest of pace unattainable pairs. Given his fixed income and commodity prices, the consumer can choose only among those bundles that lie in the triangular area OAF, including its boundaries. The existence of the unattainable set reflects the influence of the law of scarcity.

The slope of BL expresses the market evaluation of two goods. The number of units y that the consumer gives up for an extra unit of x is known as the opportunity cost of x in terms of y. so we may say that the absolute slope of BL gives the opportunity cost of x in terms of y.

The BL depends upon only two elements. The consumer's money, income (I) and commodity prices (Px and Py). When either of two elements changes, the BL shifts to a new position. However, the BL remains totally unaffected by a particular change; a proportional increase or decrease in money income and all commodity prices. Such a change leaves the horizontal and vertical axis intercepts of the BL same.