Answer to Question #180349 in Microeconomics for Shagufta Ramzan

Question

How changes in budget line takes place. Explain diagrammatically

Answer 1

Solution:

A budget line is a graphical representation of all possible combinations of two goods which can be bought with a given income or price, such that the cost of each combinations is equal to the money income of the consumer.

A budget line will shift when there is a change in the prices of one or both products with income or budget held constant. An increase in let’s say Good X price will result to the budget line shifting outwards, while a decrease in Good X price will shift the budget line inwards.

A budget line will shift when there is a change in consumers income with the relative prices of the two products held constant. A decrease in income will make the budget line to shift inwards, while an increase in income will make the budget line to shift outwards.

This has been depicted by the following graphs: