5.15 : Factors Affecting Budget Constraint II

A budget constraint or budget line is affected by a change in the income of the consumer.

For instance, a student receives a weekly allowance of $100 that he spends on buying books and snacks. If his weekly allowance doubles to $200, his purchasing power increases. He can now purchase a larger quantity of both books and snacks. The student is now able to choose a greater set of combinations of books and snacks. This allows the student to attain a combination of books and snacks that lie on a higher indifference curve. A higher indifference curve shows a higher level of satisfaction. This means he attains a higher level of satisfaction.

If his weekly allowance decreases, his purchasing power decreases. For example, with a weekly allowance of $50, he can now purchase only a smaller quantity of both books and snacks. He is now able to choose from a comparatively poorer set of combinations of books and snacks, one that lies on a lower indifference curve. This means he attains a lower level of satisfaction.

Income Change and Slope of the Budget Line

The relative price of the two goods hasn't changed. So, the slope of the new budget line does not change. This means the rate at which the student can trade snacks for books, or vice versa, stays unchanged.