Income Effect Budget Line

A budget line is also called a budget constraint because it limits total consumption possibility of a consumer.

Income effect budget line. On the other hand if income falls bl line will shift inwards to b 1 l 1 note that prices of goods x and y being constant there is no change in the slope of the budget line. In case of budget line slope p x p y as change in income does not disturb the price ratio of the two commodities the slope will not change and the budget line after change in income will remain parallel to the original budget line. The effect of changes in income on the budget line is shown in fig. If income increases the budget line will shift outwards as shown in figure 15 where the bl line shifts to в 2 l 2.

The budget lines are parallel to each other because relative prices remain unchanged. The gradient of a budget line reveals the opportunity cost. Effect of change in the relative prices apples and bananas. A budget line shows the maximum consumption of a consumer at a given income level.

Let bl be the initial budget line given certain prices of goods and income if the consumer s income increases while the prices of both goods x and y remain unaltered the price line shifts upward say to b l and is parallel to the original budget line bl. The budget line will shift when there is. If the income of any consumer goes up his budget line will shift upward to the right side parallel to the original budget line on the other side if the income goes downward will affect the budget line inward to the left. A change in the prices of one or both products with nominal income budget remaining the same.

It shifts parallelly when there is a change in income but rotates when the relative prices change. As his income increases he buys sb of y and ob of x at the equilibrium point s on p 1 q 1 budget line and still more of the two goods tc of y and ос of x on the budget line p 2 q 2. The gradient of the budget line reflects the relative prices of the two products i e.