Changes in income affect a consumer ́s choice. The new equilibrium for a greater income is higher on the budget line because the increased income allows the consumer to purchase more of both products. Higher income increases affordability of the goods, while lower income decreases it.
What happens to the budget line when income changes?
When there is an increase in income, a consumer can buy more of both goods and this shows an outward i.e. rightward shift in the budget line . On the other hand, when there is a decrease in income, the consumer's consumption possibility decreases, and the budget line shifts inwards.
How does income affect budget?
The budget constraint framework suggest that when income or price changes, a range of responses are possible. When income rises, households will demand a higher quantity of normal goods , but a lower quantity of inferior goods.
Does the change in income affect 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.
What will be the effect on budget line if income of the consumer changes but the price of both good remains unchanged?
The effect of changes in income on the budget line is shown in Fig. 8.18. ... On the other hand, if income of the consumer decreases, prices of both goods X and Y remaining unchanged, the budget line shifts downward (say, to B”L”) but remains parallel to the original price line BL .
What is an example of income effect?
The income effect is the change in the consumption of goods based on income . For example, a consumer may choose to spend less on clothing because their income has dropped. ... An income effect becomes indirect when a consumer is faced with making buying choices because of factors not related to their income.
What does budget line indicate?
Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices , such that the cost of each of these combinations is equal to the money income of the consumer.
What is the slope of budget line equal to?
It is also important to remember that the slope of the budget line is equal to the ratio of the prices of two goods .
What is a slope of budget line?
The slope of the budget line is also called the economic rate of substitution (ERS) . The slope of the budget line also represents the opportunity cost of consuming more of good A because it describes how much of good B the consumer has to give up to consume one more unit of good A.
What is price line and budget line?
“A budget line or price line represents the various combinations of two goods which can be purchased with a given money income and assumed prices of goods “. ... Given the assumed income and the price, of the two goods, the consumer can purchase various combination of goods or market combination of goods weekly.
What is budget line when it can shift to the right?
a budget line represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. If prices of the two goods remain unchanged, then with an increase in income , budget line of the consumer shifts to the right.
How does change in income affect consumption behavior?
The budget constraint framework suggest that when income or price changes, a range of responses are possible. When income rises, households will demand a higher quantity of normal goods , but a lower quantity of inferior goods. ... Also, a higher price for one good can lead to more or less demand of the other good.
What are the main determinants of budget line?
The determinants of budget line are money income of the consumer, price of good 1 and price of good 2 .
What is a positive income effect?
Normal goods and services will generally have a positive income effect. As income increases, demand also increases; and as income falls, demand falls. When demand falls in response to an increase in income, the good or service is likely an inferior good, and it is said to have a negative income effect.
Is food a normal good?
Normal goods has a positive correlation between income and demand. Examples of normal goods include food staples, clothing, and household appliances.
What is the meaning of real income?
Real income, also known as real wage, is how much money an individual or entity makes after adjusting for inflation . ... Theoretically, when inflation is rising, real income and purchasing power fall by the amount of inflation on a per-dollar basis.
