question_answer

Explain the different conditions in which a budget line can change. Ramjas always tries to buy that basket of goods which lies on his budget line. Identify the economic value.

Answer:

The get line of a consumer can change in the conditions discussed below: (i)When Income of the Consumer Changes Assuming price to be constant, budget line will change with a change in consumer's income in the following ways: [a] When Income of the Consumer Increases When income of the consumer increases, with no change in the prices of good X and good Y, then there will be a parallel rightward shift in the budget line. Good X Rightward shift in Budget line With increase in consumer's income, budget line shifts from ab to\[{{a}_{1}}{{b}_{1}}\].                           [b] When Income of the Consumer Decreases When income of the consumer decreases, with no change in the price of good X and good Y, then there will be a parallel leftward shift in the budget lines. Good X Leftward shift in Budget line With decrease in consumer's income, budget line shifts from ab to\[{{a}_{1}}{{b}_{1}}\] . (ii) When Price of Good X Changes When price of good X changes and price of good Y and income of the consumer remains unchanged, then,                                                      [a] increase in price of good X will lead to consumer buying less units of good X. The budget line will rotate leftwards from ab to\[a{{b}_{1}}\].                                                                    [b] decrease in price of good X will lead to consumer buying more units of good X. The budget line will rightwards from ab to\[a{{b}_{2}}\].                                                                Good X Budget line rotates inwards when price of good X rises and rotates outwards when price of good X falls.   (iii) When Price of Good Y Changes When price of good Y changes and price of good X and income of the  consumer remains unchanged, then,                                                      [a] increase in price of good Y will lead to consumer buying less units of good Y. The budget line will rotate leftwards from ab to\[{{a}_{1}}b\].                                             [b] decrease in price of good/will lead to consumer buying more units of good Y. The budget line will rotate rightwards from ab to\[{{a}_{2}}b\].          Good X Budget line rotates inwards when price of good V rises and rotates outwards when price of good Y falls. (iv) When Price of Both the Goods Increases Assuming consumer's income to be constant, when price of both the goods increase, then budget line will shift leftwards from ab to\[{{a}_{1}}{{b}_{1}}\] .   Good X Leftward shift in Budget line Budget line shifts leftwards with increase in the prices of both the goods. (iv)When Prices of both the Goods Decreases Assuming consumer's income to be constant, when price of both the goods decreases, then budget line will shift rightwards from ab to\[{{a}_{1}}{{b}_{1}}\]. Good X Rightward shift in Budget line Budget line shifts rightwards with decrease in the prices of both the goods.                      The economic value is to consume within one's means,