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

Diagram:

A diagram should show a standard budget line with two goods (e.g., X and Y) plotted on the axes. The budget line should be downward sloping, representing the trade-off between the two goods. The diagram should then show the budget line shifting outwards, parallel to the original budget line. The new budget line should be further away from the origin.

Explanation:

An increase in income allows the consumer to purchase more of both goods. Since the income is increased proportionally, the slope of the budget line remains the same. The budget line shifts outwards because the consumer can now afford a greater quantity of both goods at the same prices. This represents an expansion of the consumer's consumption possibilities.

Implications for Consumer Choice:

The outward shift of the budget line provides the consumer with more options. They can now afford to consume more of both goods, or they can reallocate their spending between the two goods. The consumer's optimal choice will depend on their preferences and the marginal utility they derive from each good. The consumer will aim to maximise their utility given their new budget constraint.