explain shift in budget line for 6marks answer?
Answers
The knowledge of the concept of budget line or what is also called budget constraint is essential for understanding the theory of consumer’s equilibrium.
A higher indifference curve shows a higher level of satisfaction than a lower one. Therefore, a consumer in his attempt to maximise his satisfaction will try to reach the highest possible indifference curve.
But in his pursuit of buying more and more goods and thus obtaining more and more satisfaction he has to work under two constraints: first, he has to pay the prices for the goods and, secondly, he has a limited money income with which to purchase the goods. Thus, how far he would go in for his purchases depends upon the prices of the goods and the money income which he has to spend on the goods.
In order to explain consumer’s equilibrium there is also the need for introducing into the indifference curve analysis the budget line which represents the prices of the goods and consumer’s money income.
Budget Line or Budget Constraint
Suppose our consumer has got income of Rs. 50 to spend on two goods X and Y. Let price of good X in the market be Rs. 10 per unit and that of Y Rs. 5 per unit. If the consumer spends his whole income of Rs. 50 on good X, he would buy 5 units of X; if he spends his whole income of Rs. 50 on good Y he would buy 10 units of Y. If a straight line joining 5Xand 10Vis drawn, we will get what is called the price line or the budget line.
Thus budget line shows all those combinations of two goods which the consumer can buy by spending his given money income on the two goods at their given prices. A look at Fig. 8.14 shows that with Rs. 50 and the prices of X and Y being Rs 10 and Rs. 5 respectively the consumer can buy l0Y and OX, or Stand IX; or 6Y and 2X, or 4y and 3X etc.
In other words, he can buy any combination that lies on the budget line with his given money income and given prices of the goods. It should be carefully noted that any combination of the two goods such as H (5Y and 4X) which lies above and outside the given budget line will be beyond the reach of the consumer.
But any combination lying within the budget line such as K (2X and 2Y) will be well within the reach of the consumer, but if he buys any such combination he will not be spending all his income of Rs. 50. Thus, with the assumption that whole of the given income is spent on the given goods and at given prices of them, the consumer has to choose from all those combinations which lie on the budget line.
It is clear from above that budget line graphically shows the budget constraint. The combinations of commodities lying to the right of the budget line are unattainable because income of the consumer is not sufficient to buy those combinations. Given consumer’s income and prices of the two goods, the combinations of goods lying to the left of the budget line are attainable, that is, the consumer can buy any one of them.
It is also important to remember that the intercept OB on the Y-axis in Fig. 8.14 equals the amount of his entire income (M) divided by the price (PY) of commodity Y. That is, OB = M/PY. Likewise, the intercept OL on the X-axis measures the total income divided by the price of commodity X. Thus OL = M/Px.
Answer:
An increase in income causes the budget line to shift outward, parallel to the original line (holding prices constant). ... A decrease in income causes the budget line to shift inward, parallel to the original line (holding prices constant) so a consumer can buy less of both goods with less income.