Economics – Causes of a shift in the budget | e-Consult

A budget line shows the combinations of two goods that a consumer can afford given their income and the prices of those goods. A shift in the budget line indicates a change in the consumer's purchasing power. Here are three factors that can cause a shift:

• Change in Income: An increase in income leads to a rightward shift of the budget line. This is because the consumer can now afford more of both goods. Conversely, a decrease in income results in a leftward shift.

  Example: If a consumer receives a pay rise, they can afford to buy more of both their usual goods (e.g., food and clothing) at the same prices, shifting their budget line outwards.

• Change in the Price of a Good: A change in the relative price of a good affects the slope of the budget line. If the price of a good increases, the budget line will pivot inwards. If the price of a good decreases, the budget line will pivot outwards.

  Example: If the price of coffee increases, the consumer can now buy less coffee for the same amount of money, and therefore less of other goods. This results in a steeper, inward-sloping budget line.

• Change in the Price of the Other Good: Similar to a change in the price of a good, a change in the price of the other good also affects the slope of the budget line. If the price of the other good increases, the budget line will pivot inwards. If the price of the other good decreases, the budget line will pivot outwards.

  Example: If the price of petrol increases, the consumer has less money available for other goods and services. This leads to a steeper, inward-sloping budget line.

These shifts illustrate how changes in economic conditions directly impact consumer choices and welfare.