5.14 : Factors Affecting Budget Constraint I

A Budget constraint or budget line represents the various combinations of two products a consumer can purchase, given their income and the prices of goods.

When the price of a product changes, it affects the consumer's purchasing power. For instance, a student receives a weekly allowance of $100 that he spends on buying books and snacks. Initially, with an allowance of $100, the student could buy a maximum of five books at $20 each. When the price of the book falls to $10, he can afford to buy a maximum of ten books with his weekly allowance. So, the student's purchasing power depends not only on income but also on the prices of products.

When the price of a book rises to $25, the student's purchasing power decreases. The student can now only purchase a maximum of four books.

Price Change and Slope of the Budget Line

When the price of one product changes, but the price of the other remains constant, it affects the slope of the budget line.

However, if the price of both products changes in the same proportion and in the same direction, the slope of the budget line is not affected. For example, if the price of both products is reduced to half, the slope of the budget will not change.