How the Budget Line Changes

When prices and incomes change, the set of goods that a consumer can afford changes as well. How do these changes affect the budget set?

Let us first consider changes in income. It is easy to see from equation (2.4) that an increase in income will increase the vertical intercept and not affect the slope of the line. Thus an increase in income will result in a parallel shift outward of the budget line as in Figure 2.2. Similarly, a decrease in income will cause a parallel shift inward.

Shifts Budget Line

Increasing income. An increase in income causes a parallel shift outward of the budget line.

What about changes in prices? Let us first consider increasing price

1 while holding price 2 and income fixed. According to equation (2.4), increasing pi will not change the vertical intercept, but it will make the budget line steeper since P1/P2 will become larger.

Another way to see how the budget line changes is to use the trick described earlier for drawing the budget line. If you are spending all of your money on good 2, then increasing the price of good 1 doesn't change the maximum amount of good 2 you could buy—thus the vertical intercept of the budget line doesn't change. But if you are spending all of your money on good 1, and good 1 becomes more expensive, then your consumption of good 1 must decrease. Thus the horizontal intercept of the budget line must shift inward, resulting in the tilt depicted in Figure 2.3.

Budget Line Microeconomics

Increasing price. If good 1 becomes more expensive, the budget line becomes steeper.

What happens to the budget line when we change the prices of good 1 and good 2 at the same time? Suppose for example that we double the prices of both goods 1 and 2. In this case both the horizontal and vertical intercepts shift inward by a factor of one-half, and therefore the budget line shifts inward by one-half as well. Multiplying both prices by two is just like dividing income by 2.

We can also see this algebraically. Suppose our original budget line is

Now suppose that both prices become t times as large. Multiplying both prices by t yields tpiXi + tp2X2 = m. But this equation is the same as m

Thus multiplying both prices by a constant amount t is just like dividing income by the same constant t. It follows that if we multiply both prices by t and we multiply income by then the budget line won't change at all.

We can also consider price and income changes together. What happens if both prices go up and income goes down? Think about what happens to the horizontal and vertical intercepts. If m decreases and pi and P2 both increase, then the intercepts m/p\ and m/p2 must both decrease. This means that the budget line will shift inward. What about the slope of the budget line? If price 2 increases more than price 1, so that —pi/p2 decreases (in absolute value), then the budget line will be flatter; if price 2 increases less than price 1, the budget line will be steeper.

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Responses

  • Tobias
    What happens to a budget line with the prices of both goods double?
    8 years ago
  • gruffo
    What happens to the budget line when price and income changes?
    8 years ago
  • nicole
    What causes a budget line to become steeper?
    8 years ago
  • michelle tracy
    What causes a change in a budget?
    7 years ago
  • Pentti
    What happens when budget line increase?
    7 years ago
  • silke
    Is budget related to microeconomics?
    7 years ago
  • kauko
    What shifts a budget line outward?
    7 years ago
  • bisrat
    What factor can shift the budget line outwards?
    7 years ago
  • Heli
    Why does budget line tilt?
    6 years ago
  • Heike
    What factors can shift the budget line outwards?
    5 years ago
  • GOYTIOM
    Why does a budget line shift or tilt?
    3 years ago
  • Richard Hay
    What happens to the budget set if both the price nd income us double?
    3 years ago
  • Rudigar
    What causes the budget kjne to be steeper?
    3 years ago
  • sadoc maggot
    What happens to the budget line when price of both the goods and income becomes half?
    3 years ago
  • Generosa
    What factor can shift the budget line outward?
    3 years ago
  • Arlene
    What happens when price of good 1 and2 changes budget line?
    3 years ago
  • GREG FRASER
    How budget line can change?
    2 years ago
  • Zahra
    What happn budget line when there ischange in incone?
    2 years ago
  • Carl
    What causeschange in budget line?
    2 years ago
  • astolfo
    What are factors affecting budget line?
    2 years ago
  • peter
    How does the budget line change slope position if we change income or the price of a good?
    1 year ago
  • martti
    What causes a budget line to move outward in microeconomics?
    1 year ago
  • genet
    How the budget line changes based on an increase in price?
    1 year ago
  • merimas
    What happens to the budget line when a good increase price?
    1 year ago
  • grimalda
    Does the price change make your budget line flatter or steeper explain your choice.?
    11 months ago
  • antonio
    How increases income affect budget line in microeconomis?
    9 months ago
  • Carmen
    What happens to the slope of the budget line when both prices go down?
    8 months ago
  • JOHAN
    How will an increase in income affect the budget line?
    8 months ago
  • Elen Tesmi
    What does it mean if the slope of the budget line changes indeterminately microeconomics?
    8 months ago
  • vanessa
    How does the budget line change when good y has a higher price?
    7 months ago
  • anna-liisa
    What makes the budget line change?
    5 months ago
  • Meaza
    What happens to budget line when one good becomes free?
    3 months ago
  • penelope
    What happens when both income and prices increase?
    2 months ago

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