Page 65 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 4.12 Properties of Budget Line

If the prices of two commodities are fixed or constant, then budget line will contain the following
properties:
1. It would be a straight and normal line.
2. Its slope will be negative.
3. Its slope will be equal to negative inverse ratio of prices of two commodities, i.e., oranges and
P
apples = (–) a .
P
o
4. If two budget lines represent equal prices of products but different levels of income, then both lines
will be parallel.

4.13 Shifting of the Budget Line or Price Line

The status of budget line depends upon two factors – (1) Income of consumer and (2) the price of those
two products which are desired by consumers. Following could be the changes in budget line –
1. Changes in income: If pricing of both the products will not change then the budget line will go up
if the price will go up and it will reverse if the price will change. In other words, if price of both the
products is stable and the income of consumer is changed then the status of budget line is changed,
but there is no change in slope. As Fig. 4.17 describes that when the income of consumer was 4.00
then he was able to buy the conjugation of apple and orange represent by line AB. If the income of
consumer goes up by 5.00 and there is no change in price of apple and orange then consumer can
buy more quantity of both orange and apple. Now he can buy 5 apples in spite of previous 4 and
also can buy 10 oranges instead of 8. The budget line will move to the right line CD. Thus, if the
income falls, then the budget line will come on EF, but the fallen will stable. In the words of Lipsey,
“A change in household’s income shifts the budget line parallel to itself, outwards when income
rises and inwards when income falls.”

Fig. 4.17

Y

10 C
Rise in Income : from AB to CD
8 A Fall in income : from AB to EF
Oranges 6 E

4
2
O F B D X
1 2 3 4 5
Apples

2. A Proportionate change in all prices: When income is stable and prices of all the products are
changed then the budget line changes proportionally. If prices are up then it goes to its root point
and vice versa. Thus if the average prices are dropped then there is change in the status of budget
line but the slope of budget line will not change. It will up if price ups and will fall or drop if price

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