Explain why the budget line is downward sloping.

The budget line is downward sloping because a consumer can increase the consumption of commodity X only by decreasing the consumption of commodity Y because he has a limited income so he has to make a choice between the quantity of commodity X and commodity Y.

Now, let’s say the income of a consumer is Rs 1000 and he has to buy apples and oranges. The price per kg apple is Rs 50 and apple is Rs 20. The possible outcomes could be –

• In combination A, he can purchase 50 kgs of Oranges if he buys no Apple

• In combination when he increases the consumption of Apples to 8 kgs the consumption of oranges will reduce to 30 kgs

• In combination E, he can purchase 20 kgs of Apples if he buys no Orange

The slope of budget line is

It implies the rate of exchange or the rate at which Commodity 2 can be substituted for Commodity 1.