Budget Lines

⇒ Similar to the Possibility Frontier (PPF), but like a “consumption possibility frontier”.

Info

You will often plot all other consumed goods into one combined good, as the **“ $o f o t h erco n s u m pt i o n ” * * w i t h u ni t$ .

$I = p_{1} x_{1} + p_{2} x_{2}$ —Equation of the budget constraint

y-intercept: $\frac{I}{p _{2}}$ → if you buy only $x_{2}$
x-intercept: $\frac{I}{p _{1}}$ → if you buy only $x_{1}$
gradient: $- \frac{p _{1}}{p _{2}}$
- → Opportunity cost of one unit of $x_{1}$ in terms of $x_{2}$ .
- negative, since for additional consumption of $x_{1}$ you lose your ability to consume $x_{2}$ .

Change in Budget Lines

Exogenous change in income $I$
Chnage in price $p_{1}$ or $p_{2}$ Graph
- When price of good $x_{1}$ decreases (i.e. $p_{1}$ decreases) intercept $\frac{I}{p _{2}}$ stays the same, gradient $\frac{p _{1}}{p _{2}}$ increases. Vice versa when $p_{2}$ changes.
- ⇒ Real income changes
Endowments
- Endowments are a particular basket of goods you get for free; it’s a single point in the graph—in this case, (5 pants, 10 shirts) is the endowment.
Progressive Taxes
Inter-temporal Budgets