What happens to budget line if income increases?
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.
What are the factors affecting the budget line?
Position of the budget line depends on two factors namely, income of the consumer and prices of the two goods. If prices of two goods remain unchanged, then with an increase in income, budget line of the consumer shifts to the right and vice versa.
What is the effect of price increase on budget constraint?
When the price rises, the budget constraint shifts in to the left. The dashed lines make it possible to see at a glance whether the new consumption choice involves less of both goods, or less of one good and more of the other.
When a consumer’s budget increases the budget line?
When a consumer’s budget increases, consumption possibilities expand. When a consumer’s budget decreases, consumption possibilities shrink. An decrease in the budget shifts the budget line leftward. Figure 10.4 shows the effects of changes in a consumer’s budget.
What does the slope of budget line indicate?
The slope of the budget line indicates the exchange ratio of the two goods x1 and x2, i.e., the rate at which he can substitute for x2 at the market place.
What does the slope of budget line shows?
The meaning of the budget line’s slope or price ratio is the same as the slope of a PPF. This means the slope of the curve is the relative price of the good on the x-axis in terms of the good on the y-axis. The price ratio of 2 means that José must give up 2 movies for every T-shirt.
What else is budget line called?
The budget line, also known as the budget constraint, exhibits all the combinations of two commodities that a customer can manage to afford at the provided market prices and within the particular earning degree.
Does the change in income affect the slope of budget line?
In case of budget line, slope = PX/PY 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.
Why budget line is a straight line?
A straight budget line depicts the constant slope of the budget line. The slope of the budget line given by the ratio of the price of the two goods (- P1/ P2). Constant slope and thereby, straight line is in accordance with the assumption that the prices of the two goods are given.
What is a straight line budget?
To estimate evenly spaced, and regularly increasing, rents or other revenues from a project,although reality may be a little more irregular.
What is a budget line equation?
If all income has been used for the goods, then the budget line is expressed by the linear equation: x P x + y P y = I xP_x+yP_y=I xPx+yPy=I. Where. x → quantity of good x. y → quantity of good y.
What are the two main properties of budget line?
Budget line in economics is based on two essential components – (a) purchasing power or the income of the consumer, and (b) market price of the two commodities that have been considered.
What is budget line with diagram?
The budget line can be defined as a set of combinations of two commodities that can be purchased if whole of a given income is spent on them and its slope is equal to the negative of the price ratio.
What is the significance of a budget line?
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 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.
How does a budget line change?
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.
What is the other name of indifference curve?
The diagram shows an Indifference curve (IC). Any combination lying on this curve gives the same level of consumer satisfaction. Another name for it is Iso-Utility Curve.
What information is embodied in a budget line?
A budget line shows all the combinations of any two products that a consumer can purchase, given the prices of the products and the consumer’s income.