Figure 6A-3 Hugh’s Budget Line
6A.2 The Budget Line
Indifference curves illustrate consumers’ preferences. To develop a
complete theory of their choices, we must also illustrate the available
alternatives. These are shown as the solid line ab in Figure 6A-3. That
line, called a budget line, shows all the combinations of food and clothing
that Hugh can buy if he spends a fixed amount of money, in this case his
entire money income of $720 per week, at fixed prices of the products (in
this case, $12 per unit for clothing and $24 per unit for food).
The budget line shows the quantities of goods available to a consumer
given money income and the prices of goods. Any point in this diagram
indicates a combination (or bundle) of so much food and so much
clothing. Point for example, indicates 40 units of clothing and 10 units
of food per week.
With an income of $720 a week and prices of $24 per unit for food and
$12 per unit for clothing, Hugh’s budget line is ab. This line shows all the
x 1 ,