A change in price
If the price of good X falls but the price of good Y and income remains unchanged, the
X intercept shifts to the right and the Y intercept remains intact. This is illustrated
in Figure 4.8 for a fall in the price of X from PX1
to PX2
. The slope of the budget line
falls. That is: PX1
/PY1
> PX2
/PY1
.
If the price of X were to increase, the intercept on the X axis shifts to the left. The
slope of the budget line increases. If the price of Y were to change with the price of X
and income constant, the budget line would pivot on the X intercept.
We could also imagine the effect on the budget line of an increase in the price of one
good and a decrease in the price of the other; or an increase (or decrease) in the price of
both goods where one changes proportionally more than the other. If the price of both
goods changes by the same proportion, relative prices remain the same and the budget
line shifts inwards (for a price increase) or outwards (for a price decrease) in a parallel
fashion, the slope of the budget line and the ratio PX/PY remaining constant