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Lesson 3: Budget Line Part 2: (A) Assuming There Is A Rise in Income. Price of Good X and Good y Is Constant

This document summarizes how changes in income affect a budget line when prices are held constant. It explains that if income rises, the budget line will shift parallel to the right, allowing purchase of more goods. If income falls, the budget line shifts parallel to the left, allowing purchase of less goods. It then discusses consumer equilibrium, which occurs at the point where the budget line is tangent to the highest indifference curve, where the slope of the budget line equals the marginal rate of substitution between goods.

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Wassila Elaheebux
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26 views

Lesson 3: Budget Line Part 2: (A) Assuming There Is A Rise in Income. Price of Good X and Good y Is Constant

This document summarizes how changes in income affect a budget line when prices are held constant. It explains that if income rises, the budget line will shift parallel to the right, allowing purchase of more goods. If income falls, the budget line shifts parallel to the left, allowing purchase of less goods. It then discusses consumer equilibrium, which occurs at the point where the budget line is tangent to the highest indifference curve, where the slope of the budget line equals the marginal rate of substitution between goods.

Uploaded by

Wassila Elaheebux
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Lesson 3: Budget Line Part 2

Changes in income

(a) Assuming there is a rise in income. Price of Good x and Good y is constant.

The budget line will shift parallel to the right, assuming Px and Py constant and income increases; more
can be purchased of both goods

(b) Assuming there is a fall in income

The budget line will shift parallel to the left; both Px and Py are constant, a fall in income will buy less of
both goods.

Observation on last 4 diagrams

Figure 1: The budget line shifts outwardly and because lack of information we cannot conclude whether it
is a parallel shift

Figure 2: The budget line shifts parallel because of same percentage change in prices

Figure 3 and 4: Budget line parallel when Px and Py constant, but disposable income changes.
Consumer equilibrium

Optimal choice of goods for consumer- consumer equilibrium

The budget line and the indifference curve can now be used together to show consumer
equilibrium.

A consumer’s choice is optimal at the point where the budget line touches or is tangent to the
highest indifference curve.

That is the slope of the budget line must be equal to the slope of the indifference curve.

Py/Px = MRS xy
Equilibrium point of consumer

This lesson end here: Next lesson -4 will be on changes in equilibrium

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