SHIFTS AND ROTATIONS IN BUDGET LINE

Learning Contents:                                                            

 ·          Change in Budget Line/Shifts and  Rotations in Budget Line

Change in Budget Line

The change in Budget Line can be understood in two ways 

1.Rotations in Budget Line 

2. Shifts in Budget Line. 

To understand the concept, it is assumed that the quantity of Good-X is shown on the X-axis and the quantity of Good-Y is shown on Y-axis.

1. Change in Price/Rotations/Movements in Budget Line

When there is a change in the price of only one good either Good-X or Good-Y, the budget line tends to rotate. The effect of change in price of a good is visible in four different ways mentioned below:

a. Increase in Price of Good-X: When the price of Good-X increases leaving no change in the price of Good-Y, People would buy less of Good-X that would rotate the budget line from right to left towards X-axis i.e. from ab to ac in figure 1.1 causing the budget line to be steeper.

            Figure 1.1: Increase in Price of Good-X

b. Decrease in Price of Good-X: When the price of Good-X falls leaving no change in the price of Good-Y, People would buy more of Good-X which would further rotate the budget line from left to right towards X-axis i.e. from ab to ac in figure 1.2 causing the budget line to be less steep.

          Figure 1.2: Decrease in Price of Good-X

c. Increase in Price of Good-Y: When the price of Good-Y increases leaving no change in the price of Good-X, People would buy less of Good-Y which would further rotate the budget line from right to left towards Y-axis i.e. from ab to be in figure 1.3 causing the budget line to be less steep.

Figure 1.3: Increase in Price of Good-Y

d. Decrease in Price of Good-Y: When the price of Good-Y decreases leaving no change in the price of Good-X, People would buy more of Good-Y which would further rotate the budget line from left to right towards Y-axis i.e. from ab to bc in figure 1.4 causing the budget line to be steeper.

                 Figure 1.4: Decrease in Price of Good-Y

2. Change in Income/Shifts in Budget Line/Parallel Shift

When there is a change in income of a consumer but there is no change in prices of the two goods, causes the budget line to shift. Further, high or increased income means high purchasing power and low or decreased income means low purchasing potential. The effect of change in income on the budget line is visible in two ways: 

a. Increase the Income: When the income of the consumer increases, leads to purchase of more of both goods, causing the budget line to shift rightward from ab to cd in figure 1.5. The slope stays the same or unchanged. Prices are assumed as constant.

                            Figure 1.5: Increase in Income of the consumer

b. Decrease the Income: When the income of the consumer decreases, leads to purchase of less of both goods, causing the budget line to shift leftward from ab to dc in figure 1.6. The slope stays the same or unchanged. Prices are assumed as constant.

               Figure 1.6: Decrease in Income of the consumer

Test Yourself

Choose the Correct Answer

1. A shift in budget line, when prices are constant, is due to:

a. change in demand

b. change in income

c. change in preferences

d. change in utility

2. The budget line can shift or rotate

a. only when income changes

b. only when prices change

c. when either income or prices change.

d. None of the above because changes in income and prices do not shift or rotate the budget line.

3.  What leads to Parallel shift in Budget Line? 

a. Increase in Income

b. Decrease in Income

c. Increase in Price of Good-X

d. Both a and b

4. A decrease in income tax will shift the budget line:

a. in a convex direction

b. in a concave direction

c. outward

d. inward

5. If all prices and income increase by 10%, then the budget line will:

a. move inward

b. move outward

c. remain unchanged

d. rotate around its axis

Answers:

1. b 2. c 3. d 4. c 5. c