If income is held constant, and the price of one of the goods changes then the slope of the curve will change. If the price of one of the commodity increases, the budget line will move inwards and vice versa.
Increase in price of one commodity
If the price of one of the commodity increases, the budget line will move inwards
Here, the price of commodity B had increased and with the increase in price, the curve has moved inwards. Lets see the points on x axis only, when we are not buying any units of A. Earlier with Rs 12 and price of B, Rs 1, he was able to buy 12 units of B. With the increace in price of B from 1 to 1.50 Rs, Now he can can buy 8 units of B only
Decrease in price of one commodity
If the price of one of the commodity decreases, the budget line will move outwards
Here, the price of commodity B had decreased and with the decrease in price, the curve has moved outwards. Lets see the points on x axis only, when we are not buying any units of A. Earlier with Rs 12 and price of B, Rs 1, he was able to buy 12 units of B. With the decrease in price of B from 1 to 0.80 Rs, Now he can can buy 15 units of B.
2 comments:
Graphically and numerically demonstrate what happen to budget constraint if price of goods is double.
Well explained
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