Budget constraint the consumer. The slope of the budget line. Changing the budget line with changes in income or the consumer prices of goods.

Budget constraint- the limitation on the amount of goods that a consumer can purchase imposed by his or her limited income and the prices of the goods. By assuming that a consumer spends all of his or her income on good X (hamburgers) and on good Y (soft drinks), we can express the budget constraint as

PX QX+ PYQY= I, where PX is the price of good X, QX is the quantity of good X, PY is the price of good Y, QY is the quantity of good Y, and Iis the consumer’s money income. Equation postulates that the price of X times the quantity of X plus the price of Y times the quantity of Y equals the consumer’s money income. That is, the amount of money spent on X plus the amount spent on Y equals the consumer’s income. It also states that the slope of the budget constraint is the negative of the price of the good on the x-axis divided by the price of the good on the y-axis. The slope of the budget constraint represents how many of the good on the y-axis the consumer must give up in order to be able to afford one more of the good on the x-axis.

Changes in Income and Prices and the Budget Line. A particular budget line refers to a specific level of the consumer’s income and specific prices of the two goods. If the consumer’s income and/or the price of good X or good Y change, the budget line will also change. When only the consumer’s income changes, the budget line will shift up if income (I) rises and down if Ifalls, but the slope of the budget line remains unchanged.

If consumer income increases then the consumer will be able to purchase higher combinations of goods. Hence an increase in consumer income will result in a shift in the budget line. the prices of the two goods have remained the same, therefore, the increase in income will result in a parallel shift in the budget line.

Assume consumer income increased to Rs 15.So, now he can buy more quantities of both goods.

Increase in income

An Increase in income makes the purchase of more of either one or both items possible.

If consumer income falls then there would be a corresponding parallel shift to the left to represent a fall in the potential combinations of the two goods that can be purchased.Now, suppose the consumer income falls to RS. 9.

Fall in Income

An decrease in income makes the purchase of less of either one or both items possible.

Date: 2015-01-29; view: 978