Question

What information is embodied in a budget line? What shifts occur in the budget line when money income (a) increases and (b) decreases? What shifts occur in the budget line when the price of the product shown on the vertical axis (a) increases and (b) decreases?

Answer 1

The budget line shows the different bundles of two goods which a consumer can afford with his given income. In the budget line we have the information about prices of two goods, income level and the quantity of two goods which a consumer can afford with his given income. The slope of the budget line is ratio of prices of two goods. (Px / Py).

(A) When income increases: This shifts the budget line to right side. The shift will be parallel. As more can be consumed of both goods because the money income has increased.The slope of budget line does not changes.

(B) When income decreases: This shifts the budget line parallel to left side.The shift will be parallel. As less of both goods is consumed because the income has decreased. The slope of budget line does not changes.

(C) Price of good shown on vertical axes increases: The budget line pivot inwards from y-axis, as consumer can now consume less of good on y-axis. The slope of the budget line changes. The slope of the budget line decreases. The budget line becomes flatter.

(D)Price of good shown on vertical axes decreases: The budget line pivot outwards from y-axis, as consumer can now consume more of good on y-axis. The slope of the budget line changes. The slope of the budget line increases. The budget line becomes steeper.

Diagrams are given below: