# 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.

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.

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?
9 years ago
• gruffo
What happens to the budget line when price and income changes?
9 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?
7 years ago
• Heike
What factors can shift the budget line outwards?
5 years ago
• GOYTIOM
Why does a budget line shift or tilt?
4 years ago
• Richard Hay
What happens to the budget set if both the price nd income us double?
4 years ago
• Rudigar
What causes the budget kjne to be steeper?
3 years ago
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?
3 years ago
• Zahra
What happn budget line when there ischange in incone?
3 years ago
• Carl
What causeschange in budget line?
3 years ago
• astolfo
What are factors affecting budget line?
3 years ago
• peter
How does the budget line change slope position if we change income or the price of a good?
2 years ago
• martti
What causes a budget line to move outward in microeconomics?
2 years ago
• genet
How the budget line changes based on an increase in price?
2 years ago
• merimas
What happens to the budget line when a good increase price?
2 years ago
• grimalda
Does the price change make your budget line flatter or steeper explain your choice.?
1 year ago
• antonio
How increases income affect budget line in microeconomis?
1 year ago
• Carmen
What happens to the slope of the budget line when both prices go down?
1 year ago
• JOHAN
How will an increase in income affect the budget line?
1 year ago
• Elen Tesmi
What does it mean if the slope of the budget line changes indeterminately microeconomics?
1 year ago
• vanessa
How does the budget line change when good y has a higher price?
1 year ago
• anna-liisa
What makes the budget line change?
10 months ago
• Meaza
What happens to budget line when one good becomes free?
9 months ago
• penelope
What happens when both income and prices increase?
7 months ago
• carla
Does the change in income affect the slope of the budget line?
5 months ago
• Iivari
Does the change in income affect the slop of the budget line?
5 months ago
• kacie mitchell
Does the change in income affect the slope of the budget line Explain.?
4 months ago
• vanessa
Does the change in income affect the slope of the budget line Wxplain.?
3 months ago
• tuulia
How does a budgets change?
3 months ago
• armida
When income decreases the budget line?
3 months ago
• klaus
Does the change in income affect the slop of the buget line?
1 month ago
• ciaran
Why woud the bubget line become steeper?
15 days ago
• gabriel
What is change in come affectthe slope budget line?
14 days ago
• Katja Gottschalk
Does the change in income affect the slope of the buget line explain?
7 days ago