Every point on a budget line represents a specific combination of two goods that a consumer can afford to buy by spending their entire income, given the prices of the goods. In other words, each point shows the maximum quantities of the two goods that can be purchased without exceeding the consumer’s budget
. Key details include:
- The budget line is downward sloping, reflecting the trade-off between the two goods: to consume more of one good, the consumer must give up some quantity of the other
- The slope of the budget line equals the negative ratio of the prices of the two goods, indicating the rate at which the consumer can substitute one good for the other while staying within budget
- The intercepts on the axes represent the maximum amount of one good that can be bought if the consumer spends all their income on that good alone
Thus, every point on the budget line represents the highest attainable consumption combination of the two goods that exhausts the consumer’s income, illustrating the consumer’s purchasing power and the opportunity cost of their choices
