Theory Of Consumer Behaviour

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• Questions
• Summary

A consumer budget is the real purchasing power with which he can purchase quantities of two goods, given their prices.

Budget Line: a line showing different combinations of two goods, which consumer can attain, given his income and market price of the goods. The budget line is negatively sloping.

The budget set is the collection of all bundles of goods that a consumer can buy with her income at the prevailing market prices.

Case I,
Changes in the set of available bundles of goods resulting from changes in the Consumer's Income:

1. A decrease in income causes a parallel inward shift of the budget line.
   
2. An increase in income causes a parallel outward shift of the budget line.
   

Case II,
Changes in the Set of Available Bundles of Goods Resulting from Changes in the Price of Good:

1. An increase in the price of good 1 makes the budget line steeper.
   
2. A decrease in the price of good 1 makes the budget line flatter.