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### Course: Microeconomics>Unit 5

Lesson 3: Utility maximization with indifference curves

# Budget line

What I can buy with my income. Created by Sal Khan.

## Want to join the conversation?

• Is there any situation which could produce a non-linear budget line?
• Is marginal rate of substitution is the slope of budget line?
• No, the slope of the Indifference Curve is the Marginal Rate of Substitution whereas the slope of the budget line is the Economic Rate of Substitution
• Sal said if the quantity of chocolate is 0 then the quantity of fruit is 10. How?
• Because the amount of fruit that you can buy is 20/2 dollars per pound, and hence 10, if you choose to spend all your money buying stuff.
• I have been watching a lot of these video's. They are very helpful, but I find some of these videos are out of the order in witch they should be
• Absolutely. Sometimes, Sal is using words that have not been defined yet. In those cases I go to Investopedia, where they have good explanatory videos and after I understand the concept, then I can return here.
• So the complicated equation basically implies that your expenditure cannot exceed your income?
• No, the budget line shows your maximum obtainable consumption bundles for the combination of goods presented.
• Sal mentioned Production Possibilities Frontier at the end of this video.
can anyone sum up what he said about the relationship between PPF and Budget Line?
• Sure. The Production Possibility Frontier shows the maximum amounts of two commodities that an economy is capable of producing given the current availability of resources and the level of technology. Budget Lines are a similar concept but they relate to the spending of an individual.
In a PPF diagram, the economy can either be producing on a point of the curve or within, not beyond. However if new technology or new resources are discovered such as mineral deposits, the country can actually produce more as a result and the PPF will see an outward shift.
Similarly, a consumer can purchase a combination of two goods with a fixed amount of money. A fall in the price of both goods or a rise in the consumer's disposable income means that the budget line will shift outward as purchasing power has increased in relation to the previous line.
• Would it be correct to say that the main difference between a budget line and a production possibilities frontier is that the PPF depends on labor while a budget line depends on a consumer's income?
• They are very different. A budget line has to do with the consumer. The PPF has to do with the producer.
• I wished he worked with the numbers in the formula instead of the general sense because I find that way hard to understand.
• What is the reason for the negativity of the slope of the budget line?