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

Explanation:

Inelastic demand means that the quantity demanded of a good changes very little in response to a change in its price. If the price of an inelastic good increases, the consumer will reduce their consumption of that good by a relatively small amount. However, the increase in price will still have a significant impact on the consumer's budget.

Effect on Budget Line:

If the price of an inelastic good increases, the budget line will pivot inwards. The slope of the budget line will become steeper. This is because the consumer is forced to reduce their consumption of the inelastic good, leaving less money available for the other good. The budget line will still be downward sloping, but it will be steeper than before.

Implications for Spending Decisions:

Because the demand is inelastic, the consumer has limited ability to substitute away from the good whose price has increased. Therefore, the consumer will likely continue to purchase a relatively similar quantity of the good, even at the higher price. However, they will have less money available to spend on other goods and services. This means the consumer will have to make difficult choices about which goods to prioritize, potentially reducing their overall level of utility. The consumer's spending decisions will be constrained by the higher price of the inelastic good.