As we know, income and prices can change and as incomes and prices change, there are changes in budget lines. So, we can show the effects of these changes on budget lines and consumer choices
The Effects of Changes in Income
- An increase in income causes the budget line to shift outward, parallel to the original line (holding prices constant). Which means that a consumer can buy more of both goods with more income.
- A decrease in income causes the budget line to shift inward, parallel to the original line (holding prices constant) so a consumer can buy less of both goods with less income.
The Effects of Changes in Prices
- If the price of one good increases, the budget line shifts inward, pivoting from the other good’s intercept.
- If the price of food increases and you buy only food (x-intercept), then you can’t buy as much food. The x-intercept shifts in.
- If you buy only clothing (y-intercept), you can buy the same amount. No change in y-intercept.
And a vice versa case would be :
- If the price of one good decreases, the budget line shifts outward, pivoting from the other good’s intercept.
- If the price of food decreases and you buy only food (x-intercept), then you can buy more food. The x-intercept shifts out.
- If you buy only clothing (y-intercept), you can buy the same amount. No change in y-intercept.
Additionally,
- If the two goods increase in price, but the ratio of the two prices is unchanged, the slope will not change
- However, the budget line will shift inward parallel to the original budget line.
And the Vice versa or the Opposite case would be :
- If the two goods decrease in price, but the ratio of the two prices is unchanged, the slope will not change
- However, the budget line will shift outward parallel to the original budget line.
In the next topic, we would discuss how and why a consumer decides to consume at an optimum level.
